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.
When you think of car leasing, chances are you’re thinking of personal contract hire (or PCH as it’s often abbreviated). Compared with other types of personal leasing and finance options like hire purchase, personal contract purchase and business contract hire, it’s a fairly simple one to get your head around. It's also becoming a firm favourite with thrifty motorists looking to get more value when it comes to how they drive.
So, buckle up in the backseat, here’s everything you ever wanted to know about this growing form of car finance.
What is personal contract hire?
To get to grips with personal contract hire, it’s easiest to think of it like a type of long-term rental agreement.
You make monthly payments for the privilege of riding around in a snazzy set of wheels for an agreed period of time. You are never recognised as the owner (or “registered keeper”) - this title is preserved for the finance company. When your contract comes to an end, you give the leasing company their car back.
Unlike other types of car leasing, like personal contract purchase (PCP), there is no opportunity to buy the car at the end of the lease. You have to give it back.
With personal contract hire, you are generally leasing a brand new car, right at the start of its motoring life. It gives you the opportunity to cruise in one of the latest models on the market at an absolute fraction of its ordinary purchase price. It’s no wonder personal contract hire is growing in popularity with UK motorists.
How does personal contract hire work?
Once you’ve found the car of your dreams and the leasing company has verified they have it in stock, you can go through with your application. They’ll run a credit check on you to make sure you can keep up with payments and then it’s time to agree on the details of the contract.
There are a few main things to sort out at this stage:
- How long do you want the car for?
- What initial payment will you put down?
- What are your monthly payments going to be?
- What rules do you need to abide by?
How long will my contract be?
You only have a short time with your beloved leased car before you move on and find a new beauty. Personal car leasing agreements generally last somewhere between 1 and 4 years. If you decide that it’s not love, you can leave your contract early, but not without some hefty exit fees!
What will I pay?
When you lease a car, you’re paying the cost of depreciation. Depreciation is a royal pain-in-the-rear-bumper for motorists who buy new cars. Depreciation is basically the percentage of value the car loses over time. New cars are notorious for losing their value quickly. In a car’s first three years, it can have lost as much as 40% of its initial value. Spending loads of money on something that halves in value in a couple of years doesn’t seem like a particularly wise investment - which is why leasing companies get you to pay it off for them!
Let’s use an example to show you how the leasing company works out your payment plan. Say you want a 3 year lease for a brand new Mini Countryman, which costs £22,600 for the classic model. Here’s the breakdown:
- Residual value: £22,600 - 40% = £13,560
- Divided by 36 months: £376.66
- Agreed initial payment: £376.66 x 6 months upfront = £2,260
- Residual value - initial payment: £11,300
- Final monthly payment: £313.89
The leasing company will determine a monthly cost (which they won’t use) by dividing the residual value equally by the number of months in your contract. Then, they’ll multiply this figure by a certain number of months, usually 3, 6 or 9, which gives them the initial payment upfront. Since you’re paying this off straight away, they take this away from the residual value, and then divide this new figure by the number of months again for your final monthly payment.
What are the rules?
To make sure that the car doesn’t depreciate uncontrollably, the leasing company do take some measures to make sure you’re not running it into the ground. Most cars on these agreements have an annual mileage limit, and anything above this is charged to you at a not-so-wallet-friendly rate. You’ll also have to abide by a fair wear policy. This means you’re responsible for returning the car in a sensible condition at the end of the contract - not looking like the Arkansas Chugabug from Wacky Races. Some brokers are particularly protective of their car and insist you get it serviced and repaired at a particular garage as well. It pays to make sure you’re aware of small details like these before you sign on the dotted line.
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, very vengeful finance company. Unlike PCP, they will be able to repossess your car without a court order – even if you’ve paid off more than a third of its value.
Benefits 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:
- New wheels: With personal leasing, you can bag yourself a brand new car for a really low monthly payment compared with the unrealistic cost of paying off a loan or paying outright for ownership.
- Fixed payments: Your monthly payments are set at the start of the agreement and they’re fixed from then on, so you can better plan your budget.
- No depreciation concerns: Depreciation is not a worry for you. You’ll never have to battle with potential buyers for a half-decent selling price.
- No balloon payment: You don’t need to worry about stumping up for a hefty balloon payment at the end of the contract. You’ll just wave goodbye to your car and get a new set of wheels instead.
- Full warranty: Your leased car is spanking new so it’s still covered by your manufacturer’s warranty. This will likely last the entire duration of your lease.
- No MOT: Most leases only last 3 years, so your car will never be old enough to undergo MOT testing. One less thing to worry about!
Drawbacks of Personal Contract Hire
There are obviously disadvantages with this type of lease though – I'd be lying if I said there wasn't. Here are some of the main ones:
- No ownership: You’ll never own the car. All your payments go purely towards using the car at the time. It’s like paying rent on a flat, rather than paying towards your mortgage.
- Extra charges: If you go over your mileage or you cause damage to the car, you face paying excess mileage charges at the end of the contract on top of what you’ve already paid.
- Mileage limit: If you like to hit the highway every weekend, you’re out of luck. Leases have set mileage limits on them, so you need to be cautious about how many miles you clock up. You can of course opt for a higher mileage lease, but it'll cost you!
- No modifications: Since the car isn’t yours, you can’t make any modifications to it. No colour changes, no new stereos, no touchscreen infotainment systems. You need to return it in the condition you first leased it in.
Who is personal contract hire for?
Short answer: everyone who aims to use a car purely for personal use.
Personal contract hire is aimed at ordinary, private individuals who use their cars for everyday things, like heading to the shops, commuting to work, or visiting family.
It’s particularly well suited to people who:
- Don’t rack up tens of thousands of miles every year.
- Like to have a brand new car every few years.
- Want access to the latest models at a fraction of their purchase cost.
- Have a good credit score.
It’s not well suited to people who:
- Like to give their cars DIY makeovers.
- Intend to cover a lot of ground on a regular basis.
- Want to keep the same car for many years.
- Want to be able to own their car.
If you’re looking to lease a car for business purposes, you’re in the wrong place. Check out our ultimate guide to business contract hire instead!
Where can I sign up?
You've basically got two options when it comes to signing up for a personal contract hire lease agreement: either find a dealer in the real world and then arrange a lease through them or look online for a deal at a comparison website.
When you use an online car leasing comparison website (like LeaseFetcher), you can carry out a really nitty gritty search for the best available lease for your favourite car. Narrow your search down to your favourite trim, desired CO2 emissions, engine type, and more. LeaseFetcher is the UK’s first dedicated car leasing comparison website, and it has millions of daily updated deals for you to browse through - happy lease hunting!