You might not know it, but the two common ways of financing a car are personal contract hire (PCH) and personal contract purchase (PCP). PCH leasing allows you to drive a new car every few years, with relatively low monthly payments and no worries about the car’s resale value. PCP is similar, but gives you the option of buying the car in the future. When you lease a car there are strict rules and restrictions, so make sure you understand how it work.
How does car leasing work?
Leasing a car is effectively long-term rental – you pay a fixed monthly fee to use the car for an agreed time period and number of miles.
You’ll need to pass a credit check to secure your agreement. You’ll often be able to get a better interest rate with a higher credit score.
Car leasing credit checks won’t assess your other outgoings to make sure you can afford the payments. This means you need to make sure the costs are within your budget. Use our Budget Planner to help.
To get out of a PCH deal early you may not be able to just walk away from the agreement. There may be additional costs to pay before you can leave that you hadn’t budgeted for.
This can be a problem if you’re ending the agreement because you can no longer afford the payments.
How do I finance a car with personal contract hire (PCH)?
If you’re looking to hire a car long term and don’t want to buy it, the cheapest option is likely to be using PCH. Here are the details:
- The lease agreement lasts 2 to 5 years.
- You will need to undergo a compulsory credit check.
- You have to pay around three months’ lease upfront.
- You never own the vehicle during the agreement and have to hand it back at the end of the term.
- Monthly payments are normally higher than for equivalent vehicles leased through PCP, but over the entire contract you’ll typically pay less on a PCH.
- Sometimes you can get a maintenance package that covers things like annual car tax (road tax) or servicing.
- There are strict terms and conditions, like limits to the number of miles you can do.
How much do I pay a month for a PCH?
Monthly payments are normally higher than if you had leased the car through PCP. This is because you’re borrowing the full amount of the vehicle and with PCP you’re borrowing part of the value.
However, the total amount you pay over the contract is often less than with a PCP. But every deal is different so make sure you shop around and compare the total cost including running costs.
PCP is similar in many ways, but lets you purchase the car at the end of the agreement.
Restrictions when you lease a car
As with all rental agreements, there are some restrictions you need to bear in mind:
- You won’t be able to modify the car in any way – for example, adding a tow-bar – without permission. However, you can ask the leasing company to make modifications before you take it.
- If you exceed the agreed mileage, you’ll have to pay a penalty for the extra miles at the end of the agreement. Typically this is 10p per extra mile and soon adds up, so make sure you estimate your mileage accurately – in 2015, the average household car did 7,900 miles per year. Understand the cost of going over the mileage. It may be cheaper to opt for a higher mileage agreement than pay penalties.
- You must return the car in ‘good repair and condition’ (taking into account ‘fair wear and tear’). So if, for example, a wing mirror gets broken, you might be charged to cover the cost of putting this damage right.
- If you plan on taking your car abroad, you might need to get written permission from the finance company each time you do so and there might also be a charge.
The big difference between PCP and PCH: buying and owning the vehicle
Four out of five people with PCP plans don’t opt to buy the car at the end of their contract (Source: the Finance and Leasing Association). Is it likely you’ll be one of them? If so, leasing a car through personal contract hire (PCH) might work out cheaper for you. Be careful though. If you can’t afford the PCH monthly payments and have to cancel the agreement, you may have to pay off the leasing costs in full, which would end up costing you more.
While PCP can be used as a way of leasing a car, it also gives you the opportunity to buy the car and become its legal owner at the end of the leasing contract. PCH does not.
To do this, you have to pay a ‘balloon payment’ – also known as the Guaranteed Minimum Future Value (GMFV) – at the end of the contract. This is in addition to your deposit and monthly payments, and will be a few hundred or thousand pounds.
With PCP the total amount you repay in monthly instalments is based on an estimate of how much the car will lose in value though depreciation between the start and end of the contract.
If at the end of the contract you don’t want to buy the car, you simply hand it back. As long as the car is in good condition and hasn’t exceeded the agreed mileage, you won’t have to pay any more money.
With both PCH and PCP the lender can repossess the car without a court order. But with PCP, once you have paid at least a third of the total amount payable, they can’t repossess it without a court order.
Your rights if you want to cancel a PCH plan
Ending a PCH early means that you might have to pay off the lease costs in full, so think very carefully before cancelling the agreement and find out exactly what these total costs would be.
What to do if you’re getting behind on car finance payments
Return the car
As long as you’ve paid (or can pay) half the cost of the car, you have the right to return it. For a PCH, there can be further charges, so check your agreement.
Talk to the finance company
They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.
Compare car leasing deals
If you’re thinking of leasing a car, remember to look at a few different comparison sites.
Here are some suggestions:
Making sure you don’t get behind with your monthly leasing payments
If you get behind with your monthly leasing payments, you might lose your car. So make sure you can meet your car payments.
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