So, you wanna learn about car leasing services, eh? Well, you’ve come to the right place! As the UK’s newest car leasing comparison site, we know a thing or two about how leasing works!
I’ll give you a bit of background about each option which should help you make a more informed decision when you come to change your car.
Before I jump into the nitty-gritty of each option, here are a couple of bite-sized definitions to get you started.
- PCP: With Personal Contract Purchase, the whole cost of a car is broken down into an initial deposit, monthly payments and a final (optional) balloon payment. You pay the deposit then make regular monthly payments over the course of your contract. At the end, you have the option of buying the car by paying the balloon payment.
- PCH: With Personal Contract Hire, the depreciation of a car over the contract is broken down into an initial rental and monthly payments. You pay the initial rental at the start and then make regular monthly payments over the course of your contract. At the end, you hand the car back to the leasing broker.
So there are two bite-sized definitions to get you started. In the next two sections, we’ll dig into the inner workings of each option and talk about how they differ from one another.
What is Personal Contract Purchase
Personal Contract Purchase (PCP) is the most popular car finance option in the UK and has been for some time. The last estimates I saw gave it a 73% market share, which is absolutely crazy!
Since you already know kinda how it works, let’s take a look at an example.
Let’s say your current car has died and rolled off to the great scrapyard in the sky. You fancy replacing it with something a bit swankier, let’s say a Mercedes-Benz C-Class.
You walk into a Mercedes showroom and ask about buying the car on a PCP deal. Here’s what the salesperson says.
C-Class? Nice! Okay, here’s what we can do. The list price is £37,930 so if you put down a £4,999 deposit, we can do £399 per month with a fixed interest rate of 4.76%. And if you want to buy it at the end, it’ll be £20,900.
See how it works? The dealer takes the full list price (£37,930) and splits it up into the deposit (£4,999), monthly payments (£399) and the balloon payment (£20,900).
In practice, you’re paying £19,393.24 over the two years to drive the car and can choose to buy it at the end for another £20,900.
(However, as we'll see a little later, very few people end up buying their car after their PCP deal finishes.)
Personal Contract Hire
Personal Contract Hire (PCH) is a more niche car financing option in the UK. At the moment, just 5% of cars are financed on PCH, which we think is a massive missed opportunity.
Again, since you already know how it works, here’s an example.
Just like before, let’s say your car’s finally packed it in and you’re looking to replace it with something a bit nicer. This time, let’s look at a BMW 3 Series. You call up your local leasing broker and this is what they tell you.
That 3 Series is a great car! Let’s see what we can do for you. So, looking at the 320i M Sport. For a 36-month contract, we can do you £323 per month with a 6-month initial rental and 10,000 miles.
See how it works again? The broker takes the depreciation of the car over three years and breaks it down into two chunks: the initial rental (£1,938.96) and the monthly payments (£323.16).
With car leasing, you always pay the same total amount regardless of whether you pay a higher or lower initial rental. If you pay a higher initial rental, your monthly payments will be lower. And vice versa.
What are the benefits of PCP and PCH?
Now you know what PCP and PCH are, we can start talking about what’s good and bad about each of them.
Okay, let’s start with the big one. Price. Which finance option is cheapest on a day-to-day basis?
PCH deals tend to be the cheapest because you’re only paying for the depreciation plus the broker’s profit.
The payments with PCP usually cover a bit more than just the depreciation but since a huge chunk of the car's value is left in the balloon payment, PCP monthly repayments typically aren't that far off PCH.
Next up, what about ownership?
PCP deals are kinda complicated. With PCP deals, you have the option to buy the car at the end of your deal. However, the balloon payment is usually pretty large and most people will struggle to pay off in one go.
However, when you look at the numbers, very few motorists actually buy their car at the end of a PCP deal. The last survey I saw said that just 20% of people ended up buying their car at the end of their contract.
On the other hand, there are PCH deals. With PCH deals, the car always belongs to the finance company and is always returned to the leasing provider at the end of the deal.
Updating your car
A great bonus of both PCP and PCH deals is that you get to update your car every few years.
With PCP and PCH, you can hand your car back to the broker at the end of the contract and walk away. After that, you can choose to take out another deal. If there's any residual value in your car at the end of hte deal, you can often roll that into a new deal for a discount.
What are the drawbacks of PCP and PCH?
Unfortunately, it's not all positives and both PCP and PCH have their drawbacks. Let's take a look.
Both PCP and PCH deals have extra charges that can sting you at the end of a contract. The two most common charges are damage and excess mileage.
Damage is a bit of a tricky one as cars will naturally pick up a bit of wear and tear as you use them. Little dings in the bodywork, slight wear on the seats, small scrapes on the interior — that sort of thing. The finance company expects this sort of wear and works it into their depreciation calculations.
While wear and tear is permitted, excess damage is not. Larger scrapes, deep dents, cracks in the glass, rips in the fabric and so on are all examples of damage and all need to be repaired to return the car to what’s called saleable condition.
The second extra charge, excess mileage, is much more simple. Before you begin your contract, you tell the broker how far you plan to travel and they use that number to calculate the estimated depreciation on the car.
If you travel further than you initially estimated, the car is suddenly worth less than they calculated it would be and someone has to pay for that.
Since excess mileage fees are usually quotes per mile, they tend to look really small — 5p per mile, 7.2p pence per mile and so on — but they can add up quickly. For example, 6,000 extra miles at 7.5p per mile will cost you £450. Not a nice way to end a contract!
Want to know more?
If you want to know more about the ins and outs of vehicle financing (and who could blame you?), check out our full PCP and PCH finance guides.
Or, if you’ve already decided to go with leasing, why not start your search for your perfect car today?