PCP vs PCH – should I buy or lease a car?

Personal contract purchase (PCP) versus personal contract hire (PCH). In simpler terms, that’s buying (on a finance deal) versus leasing a car.

If you’re looking for a new car and either don’t want to or can’t buy outright, this is one of the first conundrums you’ll need to get to grips with. There’s a good chance both PCP and PCH options will work for you to some degree, but one will almost certainly suit you better based on your priorities regarding budget, flexibility and ownership.

It’s something we touch on in our wider guide to how leasing works, but here we’ll really delve into the differences between the two most popular types of car financing out there.

Understanding PCP

What is PCP?

A personal contract purchase is a type of lease agreement that comes with the option to buy the vehicle at the end of the contract, making it something of a halfway house between lease and purchase.

How does PCP work?

With a PCP deal, you’ll typically pay an upfront deposit followed by a series of monthly payments. At the end of the deal, your option to buy comes in the form of a large balloon payment, which you can either pay to keep and own the car or forego and give the car back:

• Deposit: this is often around 10% of the car’s price but can vary based on the lender and the deal you’re looking at. In many cases, a no-deposit option will be available, with the upfront amount instead being spread across your monthly payments.
• Monthly payments: your monthly payment will be a fixed amount for the duration of the deal, which is typically 24-48 months. Monthly payments are calculated using the car’s current value versus a predetermined Guaranteed Future Value (GFV) – an estimate of the car’s value come the end of your contract – plus whatever interest rate your lender has applied. Interest aside, you’re essentially covering the estimated cost of depreciation on the vehicle for the time you’re using it.
• Final balloon payment: this is an optional one-off payment available to you at the end of your PCP contract. It’s typically quite big – often around 30-50% of the car’s value. If you want to own the car, you’ll need to pay it. Most people don’t, instead choosing either to refinance the balloon payment to pay it off over time, hand the car back with no further obligation or, if they have positive equity in the vehicle, use it as a deposit towards a new PCP deal.

What are the advantages of PCP?

• Breaking the cost of the agreement down into affordable monthly payments makes PCP deals more budget-friendly and higher-spec cars more accessible for a wider variety of buyers.
• The flexibility built into PCP deals allows for everything from long-term ownership to changing your car every two to three years.
• No-deposit options are often available for buyers who don’t have a lump sum of cash available to pay upfront.
• If you don’t want to take ownership of the car, you can walk away from the deal with no sell-on worries and often with positive equity in the car that you can use against a new deal.
• You don’t necessarily need good credit to get a PCP deal.

What are the disadvantages of PCP?

• The final balloon payment is often quite large – in the region of 30-50% of the car’s value.
• Because of the ownership option, monthly costs tend to be a little higher than PCH.
• There are various restrictions, terms and conditions to consider, such as an annual mileage limit and charges for any damage to the vehicle and excess mileage.

You can find out more about the advantages and disadvantages of PCP here.

Understanding leasing (PCH)

What is PCH?

Personal contract hire is essentially a long-term rental arrangement, better known as a car lease. The big difference from a PCP deal is there’s no option to own at the end of the deal.

How does PCH work?

PCH deals run in a similar manner to PCP agreements with upfront and monthly payments, minus the optional final balloon payment:

• Initial payment: most lease deals kick off with an initial payment. This is typically anywhere from 3-12 months of payments paid upfront. Again, you can find no initial payment or “zero deposit” options that remove the need for the initial lump sum and instead spread the cost across the monthly payments.
• Monthly payments: these are fixed monthly payments for the duration of your lease, with most leases lasting 24-48 months. Like PCP, these payments are calculated based on the difference between the car’s current value and its predicted value at the end of the deal, plus interest, taxes and additional fees.

Once your lease deal is up, you give the car back. It’s as simple as that. There’s no option to own the car, and you’re free to move on to another deal or walk away entirely.

What are the advantages of PCH?

• It’s generally the most affordable method of driving a new or used car.
• The flexibility of leasing makes it one of the most effective ways of getting behind the wheel of a new car every few years.
• You’ll get the most “bang for your buck” in car terms with a lease deal, meaning you might be able to get a better car on your budget than with other finance types.
• You’ll get a lot of essentials included with your deal like road tax and breakdown cover, with maintenance packages available as an optional extra.
• There’s no obligation or option to buy, which means no resale worries down the line.
• You don’t necessarily need good credit to get a PCH deal. In fact, you can find out exactly where you stand today using our free soft credit check that will let you know if you’re pre-approved for credit. Applying takes a couple of minutes and won’t affect your credit score.*

What are the disadvantages of PCH?

• There’s no option to own the car.
• Restrictions, terms and conditions are tighter than with other finance arrangements. Annual mileage limits, excess wear and tear and modification restrictions all need to be considered.
• Leasing is purely a rental arrangement, meaning you have no equity in the vehicle.
• While it’s better value in the short term, it tends to offer less value in the long term versus purchase deals.

Comparing costs

Generally speaking, leasing is a bit cheaper than PCP. Here’s why:

No ownership option

The total cost of a PCH deal is substantially less than an equivalent PCP package because there’s no final balloon payment to consider at the end. Of course, it’s up to you whether you take up the final payment on a PCP contract.

Less risk

The lack of ownership factor lowers the risk for lenders in PCH agreements, meaning more favourable pricing.

End-of-sale considerations

There’s much less complexity surrounding the end of a PCH agreement. The increased uncertainty in PCP deals is reflected in increased monthly payments.

Flexibility and terms

PCP has the edge when it comes to flexibility and the terms of the agreement. Here’s why:

End-of-contract

Things are very simple at the end of a leasing deal. You give the car back, and that’s it. While it’s nice to have the clarity, if you’re looking for flexibility, PCP is the way to go. Come the end of your PCP deal, you have the option to take up the final balloon payment (either in full or via refinancing) and take ownership of the vehicle, part exchange it against a new deal (assuming you have positive equity) or walk away entirely.

Terms and conditions

Annual mileage limits are typically more strictly defined on PCH than PCP. Likewise, returning the car in poor condition tends to result in bigger penalties.

Mid-term

PCP offers more flexibility in the middle of the contract should your circumstances change. Settling the finance early, for example, comes with early termination charges in a PCH deal.

Equity

The positive equity you’ll have likely built up over the course of a PCP deal can be used against a new deal. PCH deals don’t offer any equity, therefore there’s no benefit to be had come the end of the contract.

Maintenance and ownership

Maintenance

Maintenance options are relatively similar between PCH and PCP. Both finance types typically offer a maintenance package as an optional extra that can be baked into your monthly payments. You could argue that this is more worthwhile for a lease arrangement to ensure the car is returned in good condition, but it’s generally a good peace-of-mind addition in both instances.

Ownership

This is the biggest difference between PCP and lease – and probably the defining factor. Leasing is leasing, while PCP is leasing with the option to buy, plus the ability to build equity in the car in the meantime.

Is it worth buying the car at the end of PCP?

The short answer is yes, assuming you want to keep the car, it’s worth more than its GFV and you can afford to do so. It’s the latter element that keeps most away, as the final balloon payment tends to be substantial enough that you’ll probably need to save up for it. As such, most people don’t take up the option and move onto a new deal instead, using the positive equity they have in their current PCP deal as a deposit against a new one.

There are perks to either side of the arrangement. Pay the balloon payment, and you’ll have full ownership of the vehicle with no further financial obligations. Use your positive equity against a new deal and you’ll be able to move on to a newer, better-spec vehicle without really changing your current payments.

It’s all down to what you want from your car and finances going forward.

Decision making: PCP vs lease

So, is PCP worth it? When does PCH make the most sense? Based on everything we’ve discussed above, here’s a quick checklist for both finance types:

A PCP (purchase) deal is probably better if…

• You want the option to own the car at the end of the deal.
• You want the most flexibility possible when it comes to end-of-contract options and mid-term changes.
• You want more leeway on key terms like mileage limits.
• You want to build equity in the deal, even if you’re not sure about buying the car at the end.

A PCH (lease) deal is probably better if…

• You want the lowest total and monthly costs possible.
• You don’t want to own the car at the end of the deal.
• You want the best car possible on your budget.
• You want to move between cars every few years.
• You don’t want to deal with resale.

Find the deal that works for you with Hippo

Yes, we’re Hippo Leasing by name, but finding you the best deal possible – whether that’s PCH, PCP or something else – is in our nature.

Take a look at our full leasing range today. If there’s a model that you like the look of but want to know if there’s a cheap PCP deal that might work, give us a call and we’ll be happy to crunch the numbers on both options.

In the meantime, you can check your eligibility for finance with us right now by using our free soft credit check, without affecting your credit score.*

*This is a soft credit check that will not affect your credit score. If pre-approval is successful and you wish to proceed, you will be subject to a hard credit check which may affect your credit score. Pre-approvals are conditional and full approval may be denied subject to further checks.