Personal Contract Hire Versus Personal Contract Purchase - Which is Best?
Personal Contract Hire and Personal Contract Purchase are both car finance products that let you spread the cost of your car over an agreed upon number of months. However, with a Personal Contract Hire agreement you will never have the option to own the car, whereas in Personal Contract Purchase you can choose whether you would like to own the car or not.
Personal Contract Hire (PCH)
With PCH you are entering into a contract with a leasing company and paying a monthly rental for the use of your car. At the end of your agreement you must hand your vehicle back to the funder who are the legal owners throughout the length of your contract.
Personal Contract Purchase (PCP)
With PCP you are entering into a contract with a finance company and making a monthly payment towards the value of your car. At the beginning of your contract the finance company will provide a Guaranteed Future Value (GFV) which reflects the value of the car at the end of your contract. This sum is not paid off during the course of your contract, it is deferred until the end. When you reach the end of your contract you have 3 options: you can choose to make the balloon payment and become the legal owner of the vehicle, you can opt not to make the balloon payment and return the car back to the finance company or you can use any equity in the car as a deposit on your next vehicle.
Similarities between PCH and PCP
Flexible contract terms
With both PCP and PCH you can tailor the contract terms to suit your lifestyle. You can choose how long you would like the duration of your contract to be. This period of time is expressed in months and contracts typically last between 24-60 months.
You can also decide how many miles you would like to travel over the duration of your contract, as well as whether you would like to add a maintenance package to your agreement. A maintenance package spreads the cost of manufacturer recommended servicing and replacement wear and tear items over the length of your contract (including tyres).
With both PCP and PCH you will part with a small initial sum of money. This amount will be far below the cost associated with buying a new car outright. You will then be making monthly payments or monthly rentals which are a fixed amount. This allows easier budgeting for you, especially if you have opted for a maintenance package as this product will also reduce the risk of unexpected service costs.
Excess mileage charges
Mileage charges appear as both a similarity and a difference. When the value of the monthly rentals in a PCH are set and the Guaranteed Future Value of the vehicle in a PCP is decided, mileage is considered. This is because the more miles a car has driven the more the future value of that vehicle is decreased.
If you have driven over the mileage agreed at the beginning of your contract in a PCH, you will be charged an excess mileage charge. If you have driven over the agreed mileage in a PCP and wish to hand your vehicle back at the end of the contract you will also be charged.
The exact charge per excess mile will depend on the finance company used and the type of vehicle.
Fair Wear and Tear Guidelines
When you enter into a PCH contract you are expected to keep the car in reasonable condition. When you return the vehicle, it will be assessed in line with the British Vehicle Rental and Leasing Association's fair wear and tear guidelines. You will be charged for any damage outside of these guidelines.
If you are in a PCP contract and have decided to hand your vehicle back the same fair wear and tear rules will apply.
In PCH you will hand your vehicle back to the finance company, this is also an option in a PCP agreement. This means you do not need to worry about the future value of the vehicle, or any reselling issues, this will be the responsibility of the finance company.
Personal Contract Hire Vs Personal Contract Purchase at a Glance
Personal Contract Hire
- You will never own your vehicle
- There are no depreciation concerns as you will be returning your vehicle
- You will be charged for excess miles travelled
- You can choose your contract terms; initial rental, length of contract and mileage
- You will be charged for any damage outside of fair wear and tear guidelines
- You will make an initial rental followed by fixed monthly rentals
Personal Contract Purchase
- You can choose to make the final 'balloon payment' and own your vehicle
- There are no depreciation concerns as the future value of your vehicle is guaranteed
- You will be charged for excess miles travelled if you choose to hand your car back
- You can choose your contract terms; initial payment, contract length and mileage
- You will be charged for any damage outside of fair wear and tear guidelines if you choose to return your car at the end of the contract
- You will pay an initial deposit followed by fixed monthly payments with an optional balloon payment at the end of your contract
Differences between PCH and PCP
The main difference between PCH and PCP is ownership.
In a PCH agreement there is no option to own your vehicle. You will be paying monthly rentals for the use of the car, then at the end of the contract you must hand your vehicle back to the finance company your contract is arranged with. Throughout the life of your PCH agreement the finance company remain the legal owners of the vehicle.
In a PCP agreement you can choose whether you would like to own your vehicle or not.
The Guaranteed Future Value of your vehicle is deferred until the end of a PCP contract in what is commonly called a balloon payment. At the end of your contract you can choose to make this final balloon payment and become the legal owner of the car. Or, you can choose not to make the final balloon payment and hand the keys back to the finance company (subject to mileage and condition). In this case you will not become the legal owner of the car, the legal owner will remain the finance company.
If you have entered into a PCP and wish to make the final balloon payment at the end of the contract and keep your car, any excess miles driven outside of the agreed amount will not result in charges (execpt on a funder maintained agreement). This is because the car will now legally be yours, so the effect of the mileage on the value of the vehicle is no longer of concern to the finance company.
Fair wear and tear
If you are in a PCP contract and will make the final balloon payment becoming the legal owner of the car, there will be no final check of the cars condition. The finance company will no longer be the legal owners, as long as the GFV and all payments under the agreement are made, so are not concerned by the cars condition.
If you have any questions about vehicle funding methods, or would like to discuss the options available to you, then please give the Rivervale Account Managers a call on 01273 433480.
The comments above do not necessarily reflect Rivervale's views unless clearly stated.