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Personal Contract Hire (PCH) explained

Leasing has always been popular for business vehicles, but it's growing in popularity for personal vehicles as well

Personal contract hire (PCH) is an increasingly popular way of driving a new car for personal use. It is considered a viable alternative to a personal contract purchase (PCP) that we have discussed on many occasions previously.

A lot of people use the words ‘finance’ and ‘leasing’ interchangeably, but they are not the same thing and there are important differences between car finance and car leasing.

Personal contract hire is a form of leasing. The principle is generally the same as any kind of car rental, except that the term usually lasts three or four years rather than a few days. So while the car is in your possession, you don’t actually own it and are not making payments towards ownership.

This is different from a PCP, which is an ownership product. That means that you have borrowed the money from the finance company to pay for the car, and your monthly finance payments are paying off that to eventually take ownership of the vehicle.

The confusion tends to come from most people treating a PCP like a rental and never taking full ownership of the vehicle. But if you never intend to pay off the whole car, you may find a simple lease contract like PCH is more suitable for your needs. So let’s explore it in more detail.

How does personal contract hire work?

Contract hire has been a popular financing method for businesses to manage their vehicle fleets for many years. Instead of buying or financing cars, they simply rent them. Personal contract hire for consumers works in the same way – the key difference is that, unlike a business, you can’t reclaim VAT on personal contract hire.

Unlike a PCP or hire purchase (HP), contract hire financing is not usually arranged at a car dealership, although dealers can do this for you and more manufacturers are starting to offer ‘in-house’ PCH deals through dealers.

Instead, most contract hire customers will arrange their new car lease through either an independent broker, a specialist leasing company or the manufacturer finance company’s dedicated contract hire department. That means that you can access a huge number of leasing providers and agents from the comfort of your own home via their websites.

You can lease a new car without having to even get up off your sofa, as there are hundreds of brokers available to help you out online. If you’d like some suggestions of where to start, check out The Car Expert’s guide to the best websites for leasing a new car.

Like a PCP, you pay an upfront initial payment, followed by regular monthly payments. Other similarities are an annual mileage allowance that you must stick to, and requirements to keep the car fully serviced and in good condition. Unlike a PCP, however, there’s no debt and there’s no option to buy the vehicle at the end. You just hand it back to the lease company and – as long as it is an acceptable condition – that’s it.

Is a PCH cheaper than PCP?

Theoretically, no. But in practice, the answer is often yes.

For the same vehicle, the same deposit, same term and same mileage, there shouldn’t really be any major difference in the monthly payments for a PCH agreement compared to a PCP, as the calculations used to work out the payments will be the same. However,  PCH often works out to be cheaper – even if it’s only a few pounds per month.

The power of mass purchasing

One of the reasons for this is that the leasing companies buy thousands of cars from car manufacturers every year, so they almost always get a better price on the same car than you can get from a dealer. That means they can pass on lower rentals to you. This is particularly the case if you are choosing a car that’s in stock or an advertised offer, rather than ordering a particular specification from the factory.

The power of competition

With hundreds of brokers across the UK and many different finance providers able to arrange a contract hire agreement on the same vehicle, it is a very competitive market with plenty of offers to choose from.

This is quite different from a PCP deal on a new car, where the dealer almost always sources the finance exclusively from the manufacturer’s own finance company. With less competition, there’s less incentive to offer you the best deal possible.

What should I know that the leasing company won’t really tell me?

The leasing company remains the owner of the vehicle at all times, and you’re simply renting their vehicle from them at an agreed monthly price for an agreed term (just like renting a house, really). That gives them the power to call the shots with more control than in a finance agreement.

With PCH, you are not covered by as many consumer protections as a PCP or HP agreement because you’re not buying anything. This means you do not have the protection of voluntary termination during the agreement, nor the right to stop the finance company from repossessing the vehicle in the event of non-payment.

The flipside of lowest possible monthly payments is that contract hire agreements are usually the least flexible type of car finance. If you default on your payments, or your circumstances change and you want to terminate the agreement early, you are likely to face significantly higher costs compared to other forms of finance.

Despite leasing agreements being much less complicated than PCP finance agreements with their balloons and GFVs, there is usually an additional layor of complexity in that you generally source a car through a leasing broker, who then engages the actual leasing company. That means that the person who helps set up your lease may have no connection whatsoever to the company providing the lease or the dealer supplying the vehicle. If you change your mind and withdraw from the agreement, you may get a refund from the leasing company but you probably won’t get your money back from the broker.

Leasing is generally only available on new cars, rather than used cars. However, there are some exceptions to this rule and some leasing brokers can arrange a lease for you on a pre-registered car, or a dealer demonstrator, or some other type of near-new vehicle.

New car depreciation

Does personal contract hire include insurance?

Any deals you see advertised online won’t include any extras like insurance or servicing, or any factory options on the car. However, you can add these extras to your agreement if you like, which can be wrapped up into your overall monthly payments.

You’ll need to crunch your own numbers to work out if it’s cheaper or more expensive than sorting those things out yourself, but it does give you the opportunity to lock in your overall costs with more certainty.

Do I own the vehicle?

No. You may or may not be the registered keeper of the vehicle on the V5C logbook, but the car is owned by the finance company that provides your contract hire. You are simply renting it for an agreed period of time.

Personal contract hire – the pros and cons

Pros:
  • Leasing usually involves lower monthly payments than other car finance products such as PCP.
  • Leased vehicles are usually brand new and covered by the manufacturer’s full new car warranty, so you’re less likely to encounter vehicle faults or breakdowns than with a used car, and less likely to have to pay for any problems.
  • Routine servicing and tyre costs can be included in optional maintenance packages (at extra cost).
  • The monthly payment is fixed for the duration of the contract.
  • If you find your mileage is greater than what you had expected, the lease can often be amended to reflect this (by increasing your monthly payment).
  • Many different brokers and finance companies can arrange contract hire finance for the same vehicle, so you have much greater finance choice than with a PCP.
Cons:
  • The payments may be cheap but the contracts are usually inflexible, so trying to end a lease early may be very expensive.
  • You don’t own the vehicle and must return it at the end of the lease term.
  • You agree the mileage limit at the start of the agreement. If you go over that amount, you’ll be charged a penalty.
  • You’ll be charged for any damage to the vehicle beyond normal wear and tear, although most leasing companies will cover the first £150.
  • You don’t benefit from the same level of consumer protection that you do with a PCP or HP, like voluntary termination or repossession rights.

Is personal contract hire right for me?

You need to make sure you properly understand any finance agreement before you sign up for it, whether it’s a rental or purchase contract. Be aware of exactly how much you are paying per month as well as any fees (which are mostly non-refundable if you change your mind), and make sure you are not over-stretching yourself.

If that means that you can’t afford the car of your dreams, then so be it. There will always be additional expenses when running a car, and if you can’t afford to eat because your monthly car payment is due then you have made a fairly fundamental error.

Broadly speaking, if you are likely to change your car in a few years’ time, then PCH can be a cost-effective way to finance it.

If you are going to keep it for longer than four years, or you are not sure how long you may want or need to keep the car, then you may well be better off with a hire purchase (HP) or a personal loan instead, which will give you more freedom and flexibility.

Partners and offers

Here at The Car Expert, we are building commercial relationships with reputable leasing partners. If you’re interested in leasing a new car, you should check these out:

This article was originally published in December 2017, and was comprehensively updated in May 2021.

Disclaimer

Most car finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling or provision of car finance must be accredited by the FCA.

You should always consider the terms and conditions of any agreement carefully before taking out any form of car finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.

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Stuart Massonhttps://www.thecarexpert.co.uk/
Stuart is the Editorial Director of our suite of sites: The Car Expert, The Van Expert and The Truck Expert. Originally from Australia, Stuart has had a passion for cars and the automotive industry for over thirty years. He spent a decade in automotive retail, and now works tirelessly to help car buyers by providing independent and impartial advice.

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