In recent years, personal contract hire has become one of the most popular ways to get your hands on a car without having to pay the full market cost for it in one big ole’ sum.
So here’s everything you ever wanted to know about this super-popular form of car finance.
What is Personal Contract Hire?
PCH is completely different to hire purchase but quite similar to personal contract purchase, differing in that you don’t get the option to buy the car at the end of the agreement. This helps to keep repayments low.
With PCH, you pay monthly payments over a certain number of months, at a fixed rate and with interest and VAT. When you reach the end of the agreement, you just give the car back to the finance company. You never actually own the car – you’re just the registered keeper of it. That means you’ll be legally responsible for keeping it in a roadworthy condition, for making sure it’s got a valid MOT certificate and for taxing and insuring it.
As with any form of finance, if you don’t keep up on the monthly payments you’re likely to find that the car gets repossessed by a very angry finance company. Unlike PCP, they can repossess your car without a court order – even if you’ve paid off more than a third of its value.
This type of contract hire is generally aimed at the average person on the street, rather than businesses – who’ve got a special kind called business contract hire anyway. The key difference between the two is that you can’t claim VAT back on the cost of monthly payments, but in all truth, did you really expect to be able to do that anyway?
How does Personal Contract Hire work with cars?
The monthly payments of your personal contract hire agreement will be worked out by calculating the difference between what your car’s currently worth and what it’s expected to be worth at the end of the agreement – a term known as the residual value.
The finance company will take specific measures in your contract to make sure that your car depreciates in value as slowly as possible. This usually translates into mileage limits and requirements that you return the car in a particular condition at the end of the lease – in other words, not looking like the Arkansas Chugabug from Wacky Races. Some companies can get pretty protective of their car and insist that you get it serviced and repaired at a particular garage too so make sure you’re aware of small details like these in the contract so that you don’t get caught out.
Personal contract hire shares a lot of similarities with personal contract purchase. Like PCP, with PCH you lease a car from a finance company for a given period of time. However, unlike PCP where you have the option to buy the car at the end of the agreement, in a PCH agreement you just give it back to the company! Simple.
Let’s face facts though – few things lose value faster than cars. This is why leasing a car through PCH is such an attractive option for a lot of people. Spending loads of money on something that halves in value over a couple of years doesn’t seem a particularly wise investment in the long term – unless you’ve got money to burn, of course.
The beautiful part of personal contract hire is the fact that you’ll be able to get access to some of the newest cars and models available at a very affordable price and you don’t have to worry about the natural depreciation in value that all cars suffer from.
With PCH, you shouldn’t have the hassle of trying to keep a car that’s past its prime on the road either. Think about it. If you’re leasing a brand new car at the start of it’s life, the relatively short time that you have it in a PCH agreement (only a couple of years) means that you’re unlikely to see the major maintenance issues that can affect older cars and make your life a living hell – I’m thinking dodgy cambelts and frazzled electrics here.
Advantages of Personal Contract Hire
Personal contract hire is pretty popular with a lot of drivers in the UK, so it must be getting something right. Here are some of the advantages of opting for this type of car finance:
- You can access some really high quality, generally new, cars that could be difficult to afford on similar finance agreements
- Your monthly installments will be fixed so you don’t have to worry about not knowing how much your payments will be in the month
- You’ll be required to get out fully comprehensive insurance– just third party won’t cut it
- The monthly payments will probably be lower than most types of other finance
- You don’t have to worry about depreciation because you won’t own the car
Disadvantages of Personal Contract Hire
There are obviously disadvantages though. Here are some of the main ones:
- You won’t own the vehicle during the course of the contract
- You might have to pay for extra charges at the end of the contract, if you return the car in a bad condition
- You won’t get the chance to buy the car during the agreement
- You’ll have to keep to a mileage limit. If you go over, you might have to pay an extra charge