Personal Contract Hire Explained

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Personal Contract Hire, also referred to as PCH, is one of the most popular methods for leasing a car. PCH is a contract hire agreement that is available to individuals, whilst businesses can also arrange contract hire agreements for their workforce which excludes VAT.

Personal Contract Hire allows motorists to get a new car every few years (depending on the term of the agreement) with payments that are usually lower than getting the same car through Personal Contract Purchase, Hire Purchase or a personal loan. If you are considering financing your car through Personal Contract Hire, it is important to ensure you understand how it works, the benefits and the drawbacks before entering into a financial agreement.

How does Personal Contract Hire work?

Personal Contract Purchase explained

PCH is a long term rental agreement where you pay a fixed monthly fee for the agreed period on your contract – most PCH deals are 24, 36 or 48 months. In addition, you will be expected to pay a deposit for the vehicle, which is usually the equivalent of either 1, 3, 6, 9 or 12 months of your monthly payments. It’s worth noting that the higher the deposit, the lower the monthly payments.

Once you have found the vehicle you want to lease, you will be required to undergo a credit check, although the checks are usually less stringent than if you were taking out a PCP, HP or personal loan to finance the car.

If you pass the credit check, the finance company will require you to pay the deposit. Some companies will also require you to pay a processing fee of £100-200 at this stage too for administration. Once these payments have been made the leasing company will submit your order to the manufacturer for the car to be built.

After the car has been built it is either delivered to or collected by you. You will be able to drive the car for the term of your agreement and will need to adhere to the conditions of the contract, such as only doing a specific amount of miles per year – if you exceed your mileage allowance there will be additional fees when you return the car.

At the end of the agreement, you simply return the car to the finance company. Unlike PCP, there is no option to purchase the vehicle, although you may be able to extend your Personal Contract Hire agreement at the discretion of the leasing company. You will need to ensure that you return the car with all of the original documents and in a good condition. If the vehicle has any damage which is deemed more than general wear and tear, you may be liable for the costs to repair the damage.

What's the difference between PCH and PCP?

Personal Contract Hire has a number of similarities and differences to Personal Contract Purchase. Like PCP, you will pay a deposit and fixed monthly payments which are set out in the contract, but the differences arise at the end of the agreement. With PCP, you have the option to purchase the vehicle and become the legal owner, whereas with PCH there is no option to purchase.

With both PCP and PCH the finance company will be the legal owner of the vehicle for the duration of the contract, and you will be expected to regularly make the monthly payments. If you fail to do so, the car could be repossessed. The difference is that a car which is financed through PCH can be repossessed at any time without a court order, whereas the finance company of a vehicle on PCP will need to obtain a court order once a third of the total amount payable has been made.

As you pay for the depreciation of the vehicle through PCP, you generally pay more over the course of the agreement than a comparable car on Personal Contract Hire. Therefore, if you are one of the 4 in 5 people who return their vehicle at the end of their PCP agreement, it may be a better financial decision to opt for PCH.

Pros

  • You can change your vehicle every 24 to 60 months depending on the term of your agreement
  • At the end of your PCH agreement you simply hand the vehicle over to the leasing company, therefore you are not affected by depreciation
  • You can drive a new vehicle that may be otherwise be unobtainable without Personal Contract Hire
  • Monthly payments are generally lower than the equivalent vehicle on a PCP or HP agreement

Cons

  • All PCH agreements contain mileage restrictions, and if you go over this figure you will be expected to pay an agreed rate per mile that has been exceeded
  • You will be liable for any damage to the vehicle which is deemed above the BVRLA ‘Fair Wear and Tear’ guidelines, which will be chargeable when the car is returned to the leasing company
  • It is difficult to terminate a Personal Contract Hire agreement early, and if you choose to do so you will have to pay an early termination fee
  • You aren’t able to make any modifications to the car as you aren’t the legal owner
  • You need permission to take the car outside of the UK, and each time you want to do so there may be a charge

What happens if I am unable to pay my monthly payments?

Unlike Hire Purchase where you can return the vehicle with no additional charges once you’ve paid half of the agreed payments, you are unable to return a vehicle of Personal Contract Hire early.

If you are unable to make your monthly payments the advisable option is to speak to the finance company, who may be able to come to an arrangement to help your financial situation. They may also offer an early settlement figure, which is usually a percentage of the remaining monthly payments and may be a better long term financial decision.

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