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Car finance advice

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.

Personal contract hire is a form of leasing, so you are making fixed monthly payments for the hire of the vehicle for a fixed term. So while the car is in your possession, you don’t actually own it.

The principle is generally the same as any car rental, except that the term usually lasts three or four years rather than a few days. This is different from a PCP, which is an ownership product, even though most customers tend to treat the two products similarly.

New car depreciation

How does personal contract hire work?

Contract hire has been a popular financing method for business vehicles for many years instead of buying, and personal contract hire for personal vehicles works in the same way. The key difference is that you can’t reclaim VAT on personal contract hire.

Unlike a PCP or hire purchase (HP), contract hire financing is not usually arranged at the dealership. Customers can choose to deal with an independent broker, a specialist finance company or the manufacturer finance company’s dedicated contract hire department rather than the sales staff at the dealership. However, some manufacturers have started offering PCH agreements directly from showrooms, and more are likely to follow in coming years.

Like a PCP, you pay an upfront initial payment (sometimes called a deposit), followed by regular monthly payments. You have a similar mileage allowance that you must stick to, and the car must be kept in good condition. Unlike a PCP, however, 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.

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.

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.

Leasing is generally only available on new cars, rather than used cars (which also excludes pre-registered cars, or dealer demonstrators, or any other kinds of near-new vehicles).

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 vehicle lease offers to choose from.

The leasing company is the owner of the vehicle at all times during the agreement, and you are simply renting the vehicle from them at an agreed monthly price for an agreed term (just like renting a house, really).

As such, 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 low 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.

Does personal contract hire include insurance?

Anything you see advertised online won’t include any extras like insurance or servicing. However, you can add insurance, maintenance or breakdown cover if you like, which can be included in the monthly leasing cost and give you even greater certainty about how much you’ll be paying for your vehicle.

The downside to these add-ons is that you may well be paying more for any of those extras than if you arrange them yourself. Like anything, it always pays to shop around so you understand whether or not you’re being offered a fair deal.

Will I own the vehicle?

No. Although you may be the registered keeper of the vehicle, it’s owned by the finance company that arranges your contract hire. You are simply renting it for an agreed period of time.

Personal contract hire – the pros and cons

  • Leasing usually involves lower monthly payments than other car finance products such as PCP.
  • All leased vehicles are brand new and covered by the manufacturer’s 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.
  • 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.

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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.

Corrine Barton
Corrine Barton
Corrine is Head of SME Direct at Arval UK. She is responsible for the acquisition and retention of SME and personal lease customers for Arval's SME Direct Channel.

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