Leasing a car is a type of long-term rental agreement and is also known as Personal Contract Hire (PCH) or personal leasing.
Personal Contract Hire (PCH)
PCH allows you to rent a car for a fixed period of time without ever buying or owning it. You make an initial payment upfront followed by a fixed monthly fee for an agreed period of time. The mileage limit is agreed in advance and at the end of the contract you hand the car back to the leasing company.
How it works
The contract can last anywhere between two to five years and you will need to pass a credit check to be eligible. You make an initial upfront payment of around three monthly payments, and then pay a fixed monthly fee for the duration of the contract.
The fixed monthly fee is determined by the type of car, length of contract, agreed mileage limit, and how much the car is likely to be worth at the end of the contract. Road tax is often included and maintenance packages are available for an additional charge. At the end of the contract you give the car back to the leasing company with no option of purchasing the vehicle.
- Often has lower upfront and monthly payments for a new car than other finance options. This means that you may be able to lease a model that would otherwise be unaffordable;
- Monthly payments often include road tax;
- You can opt for a maintenance charge to be added into your package so that you don’t need to worry about the general upkeep of the car;
- Depreciation of the vehicle (the difference between the retail value of the car and how much the car is expected to be worth at the end of your contract) is not your concern as you will never own the car; and
- Provided you stay within your mileage limit and have looked after the car, it is simple to return at the end of the contract.
- You do not own the car and have no opportunity to buy it at the end of the contract;
- You have to stay within your agreed mileage limit otherwise you will charged. Excess mileage rates vary and charges can add up;
- You will be charged if the car is not in a good condition when you return it, or if you have damaged it; and
- You are tied in for the duration of the contract and ending it earlier may be difficult and expensive.
PCH can work for you if you like being able to drive a new car every few years and don’t mind never having the chance to purchase it. However as you won’t own part or all of the car at the end of contract it is important to consider other finance options to see which is best for your own personal circumstances.
Other common methods of car finance are Personal Contract Purchase (PCP) and Hire Purchase.
Personal Contract Purchase (PCP)
PCP is similar to PCH in that you make a payment upfront followed by monthly payments for the duration of the contract. The mileage limit is agreed in advance and you need to return the car in good condition. However the key difference with PCP is that you have the option of buying the car outright at the end of the contract. If you do not want to buy the car you can either return it or trade it in to get a new one.
How it works
PCP is a type of loan that helps you to buy a car but allows the flexibility of choosing whether or not you want to purchase it at the end of the contract. There are 3 components to a PCP deal:
- A deposit which is usually around 10% of the value of the car. The larger the deposit that you can afford to put down, the lower your monthly payments will be;
- The amount that you need to borrow. This is determined by the difference between the value of the car at the start of the contract and how much the car is expected to be worth at the end of the contract, minus your deposit. The monthly payments are made up of this amount plus interest. Interest rates vary but generally can be around 4-7%; and
- An optional balloon payment of what the car will be worth at the end of the contract. A balloon payment is a term used to describe the lump sum owed to the lender at the end of a car finance agreement. In PCP deals this amount is agreed at the start of the contract and is known as Guaranteed Minimum Future Value (GMFV). You only have to pay this amount at the end of your contract if you want to purchase the car outright. Loans with a balloon payment option generally result in lower monthly repayments.
- You have the option to purchase the car at the end of the contract;
- Unlike PCH and hire purchase, PCP is a flexible option if you are uncertain about whether or not you will go on to buy the car;
- The GMFV is agreed at the start so you don’t need to worry about the resale value of the car dropping during your contract;
- You can opt for additional maintenance to be added in; and
- As you are only taking a loan on the depreciation of the car monthly payments may be lower than if you chose hire purchase or a personal loan for the full amount of the car.
- Like PCH you will need to stick to the agreed mileage and return the car in good condition to avoid penalties;
- If you do want to own the car at the end PCP can end up more expensive overall than hire purchase;
- PCP can also end up costing more than PCH overall, so if you don’t need the option of buying the car PCH may be cheaper; and
- If the GMFV is very close to the actual value of the car at the end of the deal you won’t have much equity to put towards another deal.
If your circumstances change or you can no longer afford your monthly payments you have the right to terminate the PCP agreement under the Consumer Credit Act 1974, Section 99. This is known as voluntary termination and will allow you to end the contract and return the car based on two conditions:
- You repay 50% of the total amount payable. This is made up of the total amount borrowed, plus interest and fees, plus the GMFV. This means that you are unlikely to have paid 50% of the Total Amount Payable by the mid-way point in your contract as you have to pay the balloon payment also; and
- You have taken reasonable care of the car and are returning it without damages other than normal wear and tear.
If you meet the above conditions you will have nothing more to pay. Voluntary termination will appear on your credit record but is unlikely to affect your credit score as it is your legal right to end the contract under the specified conditions. However if you miss payments prior to applying for voluntary termination it will negatively affect your credit score and will also give the finance company more rights. So it is important to keep making the payments until the process is finalised.
It usually costs the finance company money when you end the contract so it can look bad if you have several voluntary terminations on your credit file. As they are likely to lose money the company may make it a difficult or long process. It can be helpful to send a letter to them which clarifies that you want to exercise your right to voluntary termination under the Consumer Credit Act 1974, Section 99.
Hire purchase (HP) is a car finance option where you hire the car for the duration of the contract, with the option to purchase at the end.
How it works
Usually car buyers are introduced to finance companies through the car dealer. The finance company buys the car from the dealer and you then enter into a HP agreement with the finance company.
You need to pay a deposit which is usually 10% or more of the car’s value, followed by fixed monthly payments over the course of the contract to cover the remaining amount plus interest. The contract can be between one and five years and interest is charged at around 4 to 8%.
At the end of the hire period you are given the choice of buying the car by paying the ‘option to purchase’ fee. This fee is usually around £100-£200 but can be more, so it is important to check. The car does not belong to you until you have paid the final payment plus this fee.
Your contract is with the finance company so any complaints that you have should be directed to them. The finance company is also responsible for any problems arising from statements made by the dealer, as the dealer is considered to be acting as their agent.
HP is also covered under the Consumer Credit Act 1974 so you can apply for voluntary termination under the same conditions as with PCP deals.
- You own the car as soon as the final payment and option to purchase fee is paid;
- If you have a poor credit score it may be easier to get an HP deal than an unsecured loan as the car is used as collateral;
- You can spread the cost of buying a car over the contract term;
- The option to purchase fee that you need to pay at the end of the contract is considerably smaller than the balloon payment required with PCP deals; and
- Voluntary termination rights apply and you are likely to have paid 50% of the total amount payable at the mid-way point through your contract.
- Monthly payments are usually higher than with PCH and PCP deals;
- You don’t own the car until you have paid the final payment and option to purchase fee;
- You are not allowed to sell the car or modify it in any way during the contract without permission;
- If you do not keep up with the monthly payments the finance company can take the car away, (until you have paid a third of the total amount payable they can do this without a court order).
As there are several car finance options available it is important to consider your requirements and budget before choosing which is right for you. It is also worth shopping around to ensure that you get the best possible deal to suit your needs.
If you have signed up to an agreement and are struggling to meet your monthly payments please see our section on debt. This will provide information on agencies who will be able to give you advice, guidance and support.
If you have signed up to an agreement which contains unfair terms you should contact Consumerline on 0300 123 6262.