What is Personal Contract Hire (PCH)?

How to get some of the cheapest monthly payments on a brand new car: Personal Contract Hire (PCH) - also known as car leasing

BuyaCar team
Aug 27, 2019

What is Personal Contract Hire (PCH)?

Personal Contract Hire - or leasing - works like long-term car rental. If you like to change your car regularly so that you always have the very latest model, then leasing could be a far simpler, more cost effective way to stay behind the wheel of a brand new car than frequently buying in cash and having to sell on your old car yourself.

Personal Contract Hire (PCH) enables you to effectively rent a new car - normally for two to four years - making an initial payment, followed by a series of fixed monthly payments. Get to the end of the contract and you simply hand the keys back and walk away with nothing more to pay (provided you've stuck to pre-agreed mileage limits and have kept the car in good condition).

Unlike Personal Contract Purchase (PCP) finance or hire purchase there's no option to buy the car at the end of the contract - no matter how much you may love it. This simplicity means that monthly payments for a brand new car may be lower than with finance alternatives - and you could get a more upmarket car for your money than you might expect.

However, as a result, there's no chance of ending up with any equity as you may do with PCP and you'll have nothing to show for your monthly payments once the contract is over, as you would with hire purchase where you own the car once all the monthly payments have been made. You can also expect leasing to cost you more overall than financing a similar used car over the same period.

PCH can be tailored to suit your circumstances: you're generally able to adjust the initial payment that's due before the car is delivered, as well as the length of agreement and mileage limit, which will all affect your monthly payments. The larger your initial payment, the lower your monthly bills will be, with longer contracts and lower mileage allowances typically cutting the monthly cost, too. 

It's important not to underestimate your mileage, however, as it's likely you'll be issued with per-mile penalty fees for exceeding the limit. Charges will also be issued for any damage to the car beyond fair wear and tear. Another downside is that the overall amount you spend to lease a series of brand new cars is likely to be much higher than financing several similar used cars for the same length of time.

As with PCP, PCH offers peace of mind for owners that if the value of the car suddenly plummets - for instance if harsh new emissions rules were introduced, penalising certain models - you won't be left out of pocket, as you would if you owned the car outright. Here the leasing company would take the hit of the car being worth less than expected.

PCH is generally only available on new cars. If you're after low monthly costs on a used car then PCP finance offers similarly low monthly payments and the option to return the car at the end of the agreement - as you would have to with a lease - plus the option to buy it for the pre-agreed optional final payment.

You can check to ensure that you're getting the best deal on a new car by comparing like-for-like PCH quotes with those of PCP finance deals and calculating the total amount of all the upfront costs and monthly payments. Bear in mind that you have greater consumer rights with PCP finance - making it easier and less expensive to hand a car back early if you're struggling to meet the monthly payments or the car is no longer suitable - than with PCH leasing, before making your mind up on whether Personal Contract Hire or PCP finance is for you.

 

PCH pros

✔  Simple: 'initial rental' plus set monthly payments
✔  Can offer lowest new car monthly payments
✔  No charge if car loses more value than expected
✔  Servicing and maintenance costs can be included

The PCH negatives

Charges issued for damage and excess mileage
No option to buy car at the end of the contract
Rarely available on used cars, costly when it is
Can be difficult and expensive to end early

How Personal Contract Hire works

1. Initial payment

  • Initial payment is usually the equivalent of 3 to 12 monthly instalments

2. Monthly payments

  • Fixed monthly payments throughout the duration of the contract

3. Return the car

  • Once all payments are made, you hand the keys back and walk away

 

Personal Contract Hire on used cars

Personal Contract Hire is not commonly available on used cars. Drivers after low monthly payments on a second-hand car with the option to return the car at the end of the contract can choose PCP finance, which also gives them the option to buy the car when the contract ends.

This lease-type agreement brings similarly low payments because monthly payments only cover the difference in value between the car's price at the start of the contract and what it's expected to be worth at the end of the term. This means that you can return the car when the contract's over - as with PCH - or make the large optional final payment to pay off the remaining finance and become the owner.

Getting a cheap Personal Contract Hire lease deal

When comparing Personal Contract Hire deals, there are two main costs to focus on - the initial payment and the monthly payment figure. Other factors to bear in mind are the length of the contract - typically longer contracts mean lower monthly payments, though that's not always the case - and the mileage allowance - the lower it is, the lower your monthly payments.

Consequently, it's crucial to compare like with like to work out which deals offer you the best value. If you don't, there's no way to tell whether a £100-per-month deal will really save you money compared with a £200-per-month alternative.

The same car may be £100 per month from one place and £200 per month from another, but if the first involves a £5,000 initial payment, while the second has a £200 initial payment, the second would cost you far less overall.

On a three-year contract, the £100 per month deal with a £5,000 initial payment would set you back £8,500, while the £200 per month offer totals just £7,200 - saving you £1,300.

Check if maintenance is included, as this varies from deal to deal, too; one deal might be £20 per month more than another, but if it includes servicing and maintenance and the other doesn't, it could still be the better value option. You'll also need to make sure the figures you're looking at include VAT. If they don't, you'll have to add 20%.

It’s important to remember that while Personal Contract Hire deals offer some of the most affordable monthly payments for new cars, they aren't normally good value in the long run, as you’re left with nothing after the agreement. If you have the savings, it may be cheaper in the long run to buy a car, then sell it when you want or need to.

 

Is there an option to buy after the Personal Contract Hire has finished?

With a typical PCH contract, there’s no option to buy the car at the end of the term. But if you do fall in love with your car, it’s always worth asking the lease company if there is a way to extend the contract or even buy the car from them.

There's no guarantee that they will agree, particularly as a one-off sale is likely to require extra effort and may involve additional costs for them, but you may be in luck. 

 

Can I cancel a Personal Contract Hire lease agreement early?

Rules and cancellation policies vary from company to company, though as a rule it is much more difficult and expensive to end a lease early than with an equivalent PCP finance deal.

You can cancel the agreement early but you are likely to be issued with substantial penalty charges, or even a bill for all of the outstanding monthly fees. If that's the case, that would involve you continuing to make all of the remaining payments even if you handed the car back.

If you think you may need to end the contract on your next car early, it's worth reading the terms and conditions regarding returning the car ahead of time to see exactly what the situation is. Alternatively, drivers who take out PCP finance have additional protections when looking to return a car early, including voluntary termination, which allows motorists to hand a financed car back ahead of time with no further charges, provided more than half of the overall finance balance has been paid. 

 

What happens if I crash a Personal Contract Hire car?

One of the conditions of Personal Contract Hire is (usually) taking out fully comprehensive insurance. This would cover any repairs should you crash the car.

However, if the car is written off, the finance company will ask for a settlement amount to end the agreement. The insurance amount will go towards this, but may not cover the full amount, as the insurer only pays out what the car is worth when it was written off. If that's the case, you'll need to find cash to make up the difference.

The earlier you are in the contract, the larger this amount is likely to be. Many insurers will pay you the full value of the car if it's written off at less than a year old, but if it's a year or two old, the settlement figure paid by the insurer could still be several thousand pounds less than what you owe the finance company.

You would be responsible for making up the difference, whether you had the cash or not. Guaranteed Asset Protection (GAP) insurance is designed to cover this risk.

If your insurance policy comes with new car replacement cover this will pay for the cost of a brand new replacement if you are the first owner and your vehicle is written off in the first year of ownership. This would likely clear any settlement with the finance company, negating the need for GAP insurance. Don't just assume you're covered, though. Make sure you know exactly what is covered by your insurance before deciding whether to opt for GAP insurance or not.

 

Latest jargon busters

  1. Electric car glossary: Electric Vehicle (EV) jargon busted

  2. What is horsepower?

  3. What is voice control?

What our customers say