Car leasing or, by its full name, personal contract hire (PCH), and personal contract purchase (PCP) are quite similar products on the surface. Both allow you to drive new cars for low monthly payments and at the end of the agreement you can hand the car back. But there are differences between the two which are worth noting.
Personal contract hire or, as it’s colloquially called, car leasing is a long-term rental agreement on new cars. As the leasing broker is purchasing large quantities of vehicles for their customers, manufacturers offer sizable discounts which get passed on to the consumer. Drivers looking to lease a car should be aware that excellent credit scores are required, and an initial payment is more often than not a mandatory part of the process. PCH can be advertised as ‘6 + 47’, for example. This means that you put down 6 month’s payments as an initial sum, followed by 47 months of rental.
The higher the initial payment, the lower the monthly payments – but the total cost of leasing will often be the same. However, the initial payment is a non-refundable deposit, and it’s worth thinking about whether you will have similar savings for the next car.
Personal contract purchase (PCP) is the most prevalent method for buying a new car in the UK. Over 80% of drivers use PCP but PCH is becoming ever-more popular. Whereas car leasing requires an excellent credit score, good credit scores are considered for PCP. This is because personal contract purchase is a finance agreement with interest, not a rental agreement. Because of this, it’s possible to use PCP to purchase new and used cars – and no-deposit options are often available.
The monthly payments for both PCH and PCP will be comparable in most cases, and both products require drivers to adhere to the agreed mileage limits and damage policy. So, what’s the difference? The major dissimilarities appear towards the end of the agreement. With leasing, as long as there is no excess mileage or damage charges to pay, you return the car to the leasing company at the end with nothing owing – just like dropping a car back to the airport rent-a-car.
PCP drivers have three options at the end of their agreement; they can return the car to the finance company, and just like leasing owe nothing if they’ve stuck to the agreed mileage and damage policy; they can pay the ‘balloon payment’ which is agreed at the start of the term and keep the car; or use any ‘equity’ to put it towards another vehicle. When comparing the two options, the easiest difference is whether you’re after convenience or choice.
Not only do PCP drivers have more options when the agreement is over, the agreement can also be ended early (at an additional cost), whereas lease deals are difficult and very costly to end early. If you know that you’re able to keep up with the payments for the entire duration and won’t need to change vehicles – either down or up-sizing – then leasing can be a more convenient option. Leasing companies also usually pay for road tax, can cover maintenance and you won’t have to deal with the deprecation or selling it on.