Personal contract hire (PCH) has become an increasingly popular option for those who want a convenient way to drive a new car without the large upfront costs.
What is personal contract hire?
Once upon a time, leasing cars was only for those who had VAT-registered businesses. It meant they could prevent tying up their money in a depreciating asset, which cars usually are.
However, over the years, leasing became more popular with non-commercial car buyers, and personal contract hire, also known as personal leasing, was born.
Essentially, PCH is a long-term rental agreement. So although you have possession of the car while the agreement is ongoing, you never actually own it. The principle is the same as a regular car rental, except it runs for a few years rather than days or weeks.
How does personal contract hire work?
Personal contract hire works similarly to most finance agreements. After deciding which car you want, you agree to the length of time you want it for (the term).
An initial deposit is sometimes required – although, at Hippo, all our lease deals come with a £0 deposit option – followed by monthly payments for the length of the term – typically two to four years.
At the end of the agreement, you don’t own the car. Instead, you hand the car back and walk away.
How much does personal contract hire cost?
Firstly, a deposit can be put down. That can be either three, six or nine months’ worth of monthly payments, depending on the contract you choose. However, the larger deposit you pay, the lower your monthly payments will be, and vice versa.
While similar to traditional finance, PCH typically has lower monthly payments. That’s because lease costs only cover only the depreciation of the vehicle over the lease period – they don’t contribute to the cost of the vehicle.
The longer you lease the car for, the cheaper your monthly payments will usually be. However, bear in mind that the longer the lease is, the more you’ll pay in interest.
Most PCH agreements come with an annual mileage allowance. When you take out your lease deal, you will agree to this beforehand. The higher your mileage allowance, the higher your payments will be.
If you exceed the mileage allowance, you’ll incur extra charges at the end of the agreement.
Warranty and maintenance
Even though you don’t own the car when you take our personal contract hire agreement, it’s still your responsibility to take care of it.
However, as PCH deals are more common for brand new cars, it’s usually covered by the manufacturer’s warranty for at least most of your lease.
Generally, maintenance is easier and cheaper with lease cars because they’re newer. However, many PCH agreements also offer an optional maintenance package.
Although these differ, for the most part, it’s a comprehensive level of service and maintenance for normal car use.
If you decide to take this option, it can save you worrying about unexpected repair costs while you have use of the car.
What happens at the end of the personal contract hire?
At the end of a personal contract hire agreement, the car is returned to the finance company. You don’t have the option to purchase it.
If you’ve kept to the mileage allowance and the car is in good condition – outside of expected usual wear and tear – that’s it; you’ll pay nothing more and you can either start a new lease agreement or walk away.
If your car needs any body or maintenance work, you may be required to pay for repairs. Likewise, if you’ve gone over your agreed annual mileage allowance, you’ll be charged a pence-per-mile penalty fee.
Pros and cons of Personal Contract Hire
Many people instantly dismiss the idea of being able to drive a new car because of the large up-front costs and the idea of maintenance costs further down the line.
If you have your eye on a shiny new car and either can’t afford large monthly repayments or simply don’t want to commit yourself fully, PCH can be a good way for you to be able to drive it without spending all your cash.
Although you’re paying for a car that you never own, when you factor in the cost of depreciation – which can be substantial when it comes to new cars – it can actually work out to be a cost-effective way to access a car.
However, like all financial decisions, there are pros and cons and whatever you choose will depend on your circumstances.
Pros Of PCH
- Fixed monthly payments, which are typically lower than other finance agreements
- Access to a new car every few years if you choose
- No hassle having to sell your car when you want a new one or worries about depreciation
- Monthly payments can include road tax and maintenance packages
- Leased cars are usually brand new and still covered by the manufacturer’s warranty
Cons Of PCH
- You won’t own the car
- Limited mileage and charges for exceeding it
- If you damage the car beyond wear and tear, you could be charged for repairs
- No modifications, as the car doesn’t belong to you
Personal contract hire vs hire purchase
Whether you opt for personal contract hire (PCP) or hire purchase (HP), you’ll have to make monthly payments over an agreed period of time.
The main difference between the two is that, when the term ends, with a HP, you own the car.
However, because with a HP agreement you’re paying off the total value of the car, the monthly instalments tend to be higher than PCH.
If you ever want to change the car after you’ve fully paid off the finance, you’ll also have to factor in depreciation.
Unlike a PCH contract, you won’t need to estimate your mileage at the start of your hire purchase agreement. But, as you won’t own the car until you have made all the repayments, you’ll need to keep the car properly maintained until the full value is paid off.
PCH offers lower short-term costs and you can usually get a better car for your monthly budget, changing it every few years.
Hire purchase, on the other hand, is one of the best finance types to own a vehicle by spreading the cost over a set period of time.
Personal contract hire vs personal contract purchase (PCP)
For the most part, PCH and PCP are quite similar. They both offer lower monthly payments and have mileage stipulations.
The main difference is that with a PCP agreement, at the end you have the option of purchasing the car after making a larger final ‘balloon payment’. With PCH, you never have that option.
PCH is generally only available on newer cars, although you can also lease Approved Used cars at Hippo Leasing.
But if you want a wider selection of used cars, PCP may be a better option, and you still have the option to return the car at the end of the agreement.
However, if you’re looking for more flexibility and have no plans to own the car outright, personal contract hire may be the better option for you.
Who is personal contract hire right for?
Personal contract hire can be right for many. By leasing a car, you don’t have to worry about depreciation, warranty or how to get rid of the vehicle when it no longer suits your needs.
It offers the chance to access a newer car for a lower cost. However, due to some stipulations, such as mileage restrictions, if you travel a lot, it may not make financial sense.
Likewise, if you want to own a car and be able to make modifications, PCH may not be right for you.
PCH has many benefits and is one option for anyone who needs a car for personal use.
It’s very suited particularly to those who like to access the latest models and change their car frequently and cost-effectively.