Introduction
So, you’ve decided you want to get a new car and are looking for the perfect finance
option to help you spread the cost of your car rather than forking out all at once.
There are a lot of car finance options out there, and between 2023-24 about two million
cars were bought in the UK using some type of finance. Of these, Personal Contract Hire
(PCH) and Personal Contract Purchase (PCP) are popular choices.
They sound similar but are quite different and both come with their own pros and cons, so
it’s important to get to grips with what’s what before making your decision.
If you’d like to learn about one of the other most common types of car finance, Hire
Purchase (HP), check out our blog article about it here.
What is Personal Contract Hire (PCH)
Personal Contract Hire, sometimes known as leasing, is essentially a long-term rental
agreement. Here’s how it works:
1. Choose the vehicle you want to drive and how long you want to drive it for – this
is usually between 2 to 4 years.
2. Agree on the terms of the rental agreement by setting out the annual mileage
limit and the duration of the contract. These help to calculate your monthly
payments, along with the cars depreciation, and its predicted value at the end of
the term.
3. You’ll then pay fixed monthly instalments for the use of the car.
4. At the end of the contract, you’ll simply return the car to the leasing company.
What are the main advantages of PCH?
- Lower monthly payments: Your monthly payments will often be lower than other finance options since you’re only paying for the cars depreciation.
- Flexibility: You can get a new set of wheels every few years without the hassle of
selling the old one. - No depreciation worries: Since you don’t own the car, you don’t have to worry
about how much value it might lose.
What are the main disadvantages of PCH
- No ownership: You must return your car at the end of the contract, there’s no
option to purchase it. - Mileage restrictions: If you go over the agreed mileage limit in your contract, you
might be hit with extra charges. - Condition requirements: When you return the car, it must be in good condition,
fair wear and tear notwithstanding. Otherwise, you may also find yourself with
extra charges.
What is Personal Contract Purchase (PCP)
Personal Contract Purchase offers more flexibility compared to PCH. Here’s a quick
rundown of how PCP works:
1. Choose the car you want and agree on the contract terms. Contracts typically
range from 2 to 4 years.
2. Make an initial deposit of around 10% of the car’s value, though this can vary.
3. From then on, you’ll pay fixed monthly instalments, similar to PCH. However,
these payments can be higher than PCH as they include a portion of the car's
value.
4. At the end of the term, you have three choices of what to do with the car:
- Hand it back to the dealer with no further obligations, provided it’s in
good condition and within the mileage limit. - Pay a one-off balloon payment, known as the Guaranteed Minimum
Future Value (GMFV), to own the car. - Part-Exchange the car and use any equity towards a new vehicle under a
new PCP agreement.
Advantages of PCP
- Flexibility: You have multiple options at the end of the contract, including
ownership. - Lower initial costs: The deposit and monthly payments are typically lower than
traditional Hire Purchase (HP) agreements. - Equity potential: If the car’s value is higher than the GMFV at the end of your
contract, you can use this equity towards your next car.
Disadvantages of PCP
- Balloon payment: If you do want to buy the car outright, the final lump sum can
be expensive. - Interest charges: You might end up paying more in interest over the term of the
contract compared to outright purchasing the car. - Mileage and condition penalties: Like with PCH, going over your mileage limit or
returning the car in poor condition can result in extra charges.
Key Differences Between PCH and PCP
To recap, here are some of the key differences between PCH and PCP;
1. Ownership:
- PCH: There’s no option to buy the car.
- PCP: You can own the car by making the final balloon payment.
2. Flexibility:
- PCH: You will always return the car at the end of the contract.
- PCP: If you don’t want to own the car, you can return or part-exchange
the car.
3. Monthly payments:
- PCH: Generally lower since you're only paying for depreciation.
- PCP: Usually higher as the payments cover part of the car’s value.
4. End of contract:
- PCH: When the contract is over, you won’t have any equity to put
towards another car. - PCP: You can carry over any equity in your car to a new PCP contract.
Getting a good deal
There are a lot of deals out there, so we’ll always recommend comparing different
lenders, but here are a few top tips for getting a better PCH or PCP deal.
- If you can, offer to pay more upfront for your PCH or PCP deal – doing so will
often mean lower monthly payments. - Carefully consider the mileage you’ll be doing as the lower the limit you agree on,
the lower the cost of your monthly payments. Just be mindful not to agree to a
limit you’re likely to go over. - This may be an obvious one but consider picking a cheaper make and model of
car as this will also mean lower monthly payments. - Look for makes and models of cars that are better at keeping their value, this can
help lower payments too.
Should I choose PCH or PCP
When it comes to car finance, both PCH and PCP offer more flexible ways to get a new
car without the obligation to buy it and take on all the responsibilities of owning a car at
the end of your contract. Which one works best for you depends on your budget and
lifestyle.
PCH tends to come with lower monthly payments and the convenience of being able to
easily switch cars every few years without any commitment. On the other hand, PCP
gives you more options and you’ll be able to benefit from the car’s equity should you want
to start another PCP agreement. If you know for sure that you want to own the car, on the
other hand, you might be better off choosing a more traditional Hire Purchase agreement.
By understanding these two popular finance options, you can make a more informed
decision and choose the one that’s going to be better value for you and your needs.
Check out our blog for more tips and advice about car finance and how to get on track for
getting your new car.
Choose My Car offer a large selection of used cars, for all types of budget and circumstances. Whether it’s bad credit car finance or Personal Hire Purchase , we have you covered! Get in-touch today and drive away in your dream car.
