Our Busy Buyer's Guide To PCP and PCH
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| What Exactly Is It? |
PCH:
Personal Contract Hire
A lease on a car |
PCP:
Personal Contract Purchase
A type of hire purchase |
What’s the deposit?
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Typically a multiple of the monthly payments
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Can be a cash value (e.g. £5,000) or a multiple of the monthly payments
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What’s in the monthly payments?
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A VAT inclusive amount to cover depreciation, interest charges and the tax disc
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The cost of depreciation and interest charges but VAT isn't charged on the payments
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Who pays for tax disc renewals?
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Included in the monthly payments
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You pay separately at tax disc renewal time each year
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Do I get a discount?
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Any price discounts are already included; typically the leasing company will have negotiated a discount for you
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You haggle, but you may also get an extra discount as a finance company deposit contribution
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Who pays for depreciation?
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The leasing company forecasts the depreciation and this is fixed for the life of the lease (as long as you take care of the car), so you still pay for depreciation but your liability and the cost to you is fixed
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The finance company forecasts a final payment based on what the car might be worth at the end of the contract, but this payment has to be less than the car will really be worth, so you pay more in depreciation than through PCH
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Who takes the risk on depreciation?
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The leasing company takes the risk on second hand values – it profits or loses according to whether it got the forecast depreciation right or wrong
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The dealer/finance company takes the risk. If the final payment is set too low you can sell the car or trade it in and profit from the surplus. If the final payment is set too high then you can just hand back the car to cover it and walk away
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Ownership?
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No
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Yes, if you want it
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Advantages
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Initial payment can be tailored to suit your budget, bigger initial payments mean lower monthly payments, but won’t necessarily affect the total you pay.
You can choose your own mileage limits (within certain bands) and the length of the contract to suit your personal needs.
Normal responsibilities of ownership, such as sourcing the best deal and obtaining the best resale value, are avoided, as is the risk of the residual value being less than expected.
Usually cheaper than PCP because the leasing company can recover VAT on the price of the vehicle, even though it must charge VAT on the monthly payments
Car manufacturers frequently subsidise the price in PCH because it's hidden from the customer, which results in lower monthly payments.
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Deposit amount is up to you, subject to the lender’s minimum, and bigger deposits should lower the total finance costs
If you exceed the mileage limits you can either pay an excess fee or keep the car (assuming you have funds to buy)
If the end value of the car is more than the forecast residual value you can sell the car for the actual value and either keep the difference or use it as a deposit towards a new car
The car's expected future value at the end of the finance agreement is fixed, so you know how much depreciation will be and how much you will get for your car when you have finished the finance repayments
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Disadvantages
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Early termination of the agreement may incur a penalty
If the vehicle is returned with more mileage than that agreed for the term of the lease, or is not in a condition appropriate for its age and the lease mileage, then 'end of contract' charges may be made by the leasing company for repairing excessive wear and tear or to compensate for higher mileage
You can’t profit from selling the car for a higher price (for example if you’ve looked after the car and it’s in good condition for its age and mileage)
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Exceeding the agreed contract mileage will normally incur an excess mileage charge
Not taking care of the car can incur hefty charges for putting right bumps and scrapes
You will normally have to make your own arrangements to pay for the annual tax disc renewal (unless you have also arranged a maintenance contract which includes this service)
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Summing Up:
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If you're happy with never owning a car and don't want the risk of changes to second-hand values then PCH has a clear advantage
But remember that the leasing company will take all the profit when second hand values are high
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If you want the 'feel' of owning your car then PCP can give you this option at the end of the contract
And if you want to run the car for more than the finance contract term, you get the option to buy it at the end of the contract
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Want To Know More?
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Our detailed guide to PCH »
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Our detailed guide to PCP »
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