Personal car leasing contract types

This guide covers both Personal Contract Hire (PCH) and Personal Contract Purchase (PCP), with a comparison between the two so you can decide which is best for you.

Personal Contract Hire

Personal Contract Hire (PCH) is a way to fund your car in which you pay an initial rental, followed by an agreed number of monthly rentals, for an agreed time. At the end of your contract, you will hand your car back to the leasing company, you will never own your vehicle.

Starting your contract

After you have found the car you wish to drive you will be asked to decide upon the following features of your contract:

  • Mileage - how many miles are you likely to travel over the course of the contract?
  • Contract length - how long would you like to retain the car for? Typically contracts are between 24-60 months.
  • initial rental - how much money would you like to pay in the first month of your contract. It is usually a multiple of the monthly rental shown and are typically 3,6 or 9 times the monthly rental. The initial rental is part of the total cost of the agreement, it is not a deposit and will not be returned to you at the end of your agreement. The higher the initial rental the lower the monthly rentals will be.

These figures are then sent to the leasing company along with your personal details needed for a credit check to be performed. The broker will ask you to provide the documents needed for your finance application and credit check and submit these for you. If your application is accepted the leasing company will buy the car on your behalf and your new car will be delivered to you.

Monthly rentals in a Personal Contract Hire agreement

During your agreement, you will be required to pay a regular monthly rental to drive your car. This figure is agreed at the start of your contract and is fixed for the duration of the contract.

You will be paying for the cost of depreciation throughout your contract, not the total cost of the vehicle. This can make the monthly rentals in PCH lower than other forms of car finance where the whole vehicle cost is considered, such as Hire Purchase. It also makes more prestige vehicles which have lower rates of depreciation more affordable.

At the end of a Personal Contract Hire agreement

At the end of your contract, you will not have an option to own your vehicle. The car will always remain the property of the leasing company and so you must hand your vehicle back. Your broker can arrange for the vehicle to be collected from the address you indicate is most convenient and you can move on to your next brand new vehicle.

Benefits of a Personal Contract Hire agreement

Affordability

You can pay a low initial rental, followed by monthly rentals which are typically lower than monthly payments involved in a Hire Purchase or Personal Contract Purchase agreement, allowing you to drive a car you may not otherwise be able to afford.

Monthly rentals are fixed which allows easier budgeting for you. You can also include a maintenance package in your contract. This spreads the cost of all servicing costs and replacement of wear and tear items including tyres over the length of your contract. This reduces the risk of any unexpected maintenance costs.

Road tax is included in most Personal Contract Hire agreements.

Flexibility in a PCH agreement

You can tailor your contract to suit your lifestyle. You can choose how much you would like to pay as an initial rental, how many miles you would like to travel, and whether you would like maintenance included (funder maintained).

Considerations in a PCH agreement

excess mileage

You will have agreed how many miles you would like to drive the car for at the beginning of your contract. This figure is used when considering the depreciation of the vehicle, and so affects the cost of your monthly rentals. If you drive over the agreed mileage you will be charged a fee for every extra mile. The amount you will be charged will depend upon the finance company funding your car and the make of vehicle. You can find out the excess mileage cost for your car at the beginning of your contract.

fair wear and tear

The better the condition of a car the more valuable it is. When a finance company considers the cost of depreciation it assumes the car will be returned to them in a fair condition, so will check for any damage.

To ensure the same standard is always used the British Vehicle Rental and Leasing Association has produced a guide for all finance companies to use. If there is any damage to your car outside of fair wear and tear guidelines when your vehicle is returned, you will be required to pay for repairs.

Ownership

You will never have the opportunity to own your vehicle in a PCH agreement. The legal owner of the car will always be the finance company. This means you will need to seek permission if you wish to make any alterations to your car, or if you would like to take your car out of the country.

Additional costs

You will be required to have fully comprehensive insurance and you may wish to consider taking out GAP insurance to protect yourself in the event of a total loss.

Changes to VAT are out of the finance companies control but will affect your monthly rentals.

Can I cancel a Personal Contract Hire agreement?

If you wish to cancel your agreement you will need to request an early termination figure from your leasing company, your broker will be able to do this for you. There will be a charge for terminating your contract early.

Personal Contract Purchase

Personal Contract Purchase (PCP) is a finance product in which you make monthly payments towards the value of your car. At the end of the contract, you can decide whether you would like to make a larger final payment and keep the car, not make the payment and hand the keys back (subject to mileage and conditions), or part exchange the car using any equity towards the deposit on your next car.

Starting your contract

Once you have found your perfect car and decided that you would like to fund that car using PCP you will need to decide on the terms of your contract, this will include:

  • Mileage - how many miles per year are you likely to travel?
  • Length of contract - how long would you like to spread your payments over? This figure is normally measured in months which usual contracts ranging from 24-60 months.
  • Initial payment - How much deposit would you like to pay at the beginning of your contract?

This information will be presented to the finance company who will be funding your vehicle, along with the details required for a credit check to be made so you can apply for credit. Whomever you are buying your car from will ask for all the documentation needed and organise this application for you. If your finance application is successful, the finance company will pay for the car on your behalf and you can start driving it.

Monthly payments in a personal contract purchase agreement

To decide upon the value of your monthly payments the finance company will consider how much the car will be worth at the end of your contract. To do this they consider many factors including the mileage figures and contract length you have specified. The finance company will then create a Guaranteed Future Value, this is often referred to as a 'balloon payment' and reflects the value of the vehicle at the end of your contract.

The total of the GFV is deferred until the end of your contact, so you will not be paying this value back during your monthly payments.

At the end of a Personal Contract Purchase agreement

At the end of the contract length, the GFV figure is outstanding. At this point you have 2 options;

  1. You can choose to pay this amount and own the car. This means your car payments will end and you are free to do as you wish. If you decide to sell the car and it raises more than the GFV you can keep the profit.
  2. You may decide that you would not like to own the car in which case you do not need to make the balloon payment, you simply hand the keys back. There are several reasons you may decide to do this; you may want to drive a newer car and so begin a new finance agreement, you may find the car has devalued more quickly than initially thought and so do not wish to take this depreciation risk, or your vehicle needs may have changed.
  3. You can part exchange your car at the end of the contract and if the value is greater than the balloon payment, you can use this equity towards the deposit on your next car.

Whatever the reason behind making the final payment and keeping the car, or handing the keys back, the decision is yours to make.

The benefits of a Personal Contract Purchase contract

Flexibility

There is an enormous amount of flexibility involved in a PCP contract. As the customer you can choose how long you would like your contract to last for, the amount of initial payment you would like to make and how many miles you will travel throughout the contract, you can tailor the contract terms to your individual needs.

There is also flexibility at the end of the contract. You can choose whether you would like to pay the total of the GFV, part exchange and use the equity towards the deposit on your next car, or just hand the keys back.

Affordability and budgeting

A PCP can be organised to make a low initial payment, meaning you do not need a large amount of saving to get behind the wheel of a new car.

The monthly payments you are then required to make are fixed allowing for easier budgeting.

In many cases, you can also arrange to have servicing and maintenance costs built into your monthly payments. This reduces the chance of any unexpected motoring costs by spreading maintenance costs evenly over the length of your contract.

As the GFV is deferred until the end of the contract, monthly payments are typically lower than if you had entered into a Hire Purchase agreement without a balloon payment.

There is no risk of negative equity for you. The GFV is fixed at the beginning of the contract. This means if the value of your car is lower than expected at the end of your contract, you can hand the keys back to the finance company and any loss made is theirs (subject to condition and mileage).

Points to consider in a Personal Contract Purchase contract

fair wear and tear guidelines

If you enter into a PCP finance agreement the value of the car will also depend upon its general condition at the end of the contract. To provide an objective way of assessing a vehicles condition the fair wear and tear Guidelines are used. These guidelines are created by the BVLRA, who is the trade body for the motor industry. No vehicle is going to be in perfect condition after being driven for several years so these guidelines allow for a certain number of stone chips and scratches. If any damage on your vehicle falls outside of these guidelines you will need to pay for repairs.

excess mileage charges

At the beginning of your PCP, you will have decided how many miles you will travel during the contract. This figure is used to calculate the GFV of your car and so if you travel over this agreed mileage you will be charged for all the excess miles covered. The amount charged varies depending on the finance company used and the type of car. You can ask what the excess mileage charge would be for your car at the beginning of the contract.

Vehicle ownership

With a PCP, you will not be the legal owner of your vehicle unless you make all the payments including the guaranteed future value. Until this point, the finance company is the legal owner.

Additional costs in a PCP

Road tax is not commonly included in a PCP contract. You will need to pay separately for this. You will also need to make sure you have fully comprehensive insurance. You may also wish to consider taking out a GAP insurance policy to protect yourself in the event of a total loss.

Can you cancel a Personal Contract Purchase contract?

You can ask for a settlement figure at any point in your contract to find out how much it would cost you if you needed to end your agreement.

 

Differences between PCH and PCP

Ownership

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.

Mileage Charges

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 (except 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 car's 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 condition of the car.

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