What is the difference between PCP and PCH?

With more and more people using a finance type to pay monthly to afford their next brand new vehicle as opposed to purchasing outright, we have produced the below article to give a better insight into the 2 main ways of finance, PCP (Personal Contract Purchase) and PCH (Personal Contract Hire).

Brief introduction

To outline what each method of finance actually means in a nutshell, we have provided the below couple of descriptions: 

PCP (Personal Contract Purchase) gives you, the customer, the option to purchase the vehicle at the end of the contracted period once all monthly payments have been received by the finance company. 

PCH (Personal Contract Hire) is where you lease the vehicle over the contracted period of time with the view to hand the vehicle back at the end of the contract once all monthly payments have been made. This is also more well known as ‘Car leasing’.

PCH vs PCP

In most cases, PCP is usually more expensive compared to PCH due to deposits and a balloon payment at the end of the contracted period. A balloon payment only features within a PCP contract as this is the optional amount which is payable to the finance company before you will take full ownership after your contract has finished. Whereas, within a PCH contract, the vehicle is simply handed back to the finance company once your contract is over. 

PCP will more than likely be more expensive when compared with PCH because you have the option to purchase the vehicle at the end of your contract, meaning that you are paying more towards the monthly instalments as you will potentially own that asset in the future which you can then sell on. With PCH, you will never own the vehicle so you will only pay your fixed monthly rentals for the contracted period and then hand the vehicle back.

Is a deposit needed for PCP?

A deposit will vary depending on what vehicle you choose and who the provider is, sometimes a deposit isn’t needed however, this will change depending on certain factors. As a rule of thumb, most providers of PCP will ask for at least a 10% of the vehicles list price as a deposit figure.

Is a deposit needed for PCH?

Within Personal Contract Hire, an initial rental will be needed from the customer either before delivery is booked or upon the vehicle has been delivered. This will be in the form of 1 month upfront, 3 months, 6 months, 9 months, or 12 months. This will be the equivalent of your monthly rental multiplied by the number of months you wish to put upfront. Ultimately, the higher the upfront payment, the lower your monthly rental will be.

How do PCP monthly payments work?

Within a PCP contract, the monthly payments which are paid to the finance company cover the difference between the original list price of the new vehicle against what it is expected to be worth once your contract has finished. This is called GFV (Guaranteed Future Value). Within a PCP contract, you will also most likely pay interest which is usually anything between 4% - 7%.

How do PCH monthly payments work?

When leasing a vehicle through Personal Contract Hire, your monthly payments will be fixed for your agreed contract term and the amount of mileage which you do per annum. At the end of the contracted term, the vehicle is simply returned to the finance company and your rentals will cease. 

When ordering your lease vehicle, additional services can be opted for which may add an extra monthly cost on top of your rental for things such as servicing and maintenance packages. These are completely optional and down to the customer to decide whether they wish to add these on or not.

Is there a final payment for PCP contracts?

Within a PCP contract, if you wish to own the vehicle once your contract ends, you will be required to pay a final balloon payment to cover the remaining of the outstanding balance. This will be a figure disclosed by the finance company and could also include an additional ‘Purchase Fee’ which could be up to £500 to be paid along with the balloon payment. 

If you choose to hand the vehicle back and you have potentially exceeded the agreed mileage allowance, you may have to pay an excess mileage charge. This figure will be dependant on how many more miles have been driven over what had been agreed and what the price is of each excess mile over the limit. This will be specified within your contract.

Is there a final payment for PCH contracts?

Within PCH contracts, you will have fixed monthly rentals until your contracted period is over when the vehicle will be collected from you. 

Just like a PCP, if you exceed your mileage allowance you will pay an excess mileage charge depending on how many miles you have gone over your agreed allowance. If the car is damaged, you may also pay additional charges otherwise, the vehicle will be handed back and you can then choose your next lease vehicle!

How long does a PCP contract last?

PCP contracts usually can be anywhere between 2-4 years and this contract length is completely down to the customer to decide. After the contract ends, you will have the option to buy the vehicle outright, return it to the finance company or part exchange the car. In this aspect, PCP contracts can be seen as being more flexible than a PCH. The longer the contract length, the lower the monthly payment will be as the total cost is spread throughout the contract. If your PCP contract lasts longer than 3 years on a brand new vehicle, you will be required to MOT the vehicle on the third year and annually after this for as long as you obtain the vehicle.

How long does a PCH contract last?

PCH contracts usually last anywhere between 2-5 years and again, the length of contract is completely down to what the customer chooses. Once the contract finishes, the vehicle will then simply be returned to the finance company. Sometimes, the contract can be extended, should this be an option to you however, this would be at the finance companies’ discretion.

Can I end or change my PCP contract early?

A PCP contract will usually always be for a fixed period of time which will be determined by you, the customer, at the point of order. However, there will be opportunities to end your contract before the scheduled end date by paying the difference in how much the vehicle is worth and how much you owe for the remainder of your contract. 

If you did wish to end your contract early, finance companies usually advise that you need to have paid off half of the vehicles value at a minimum before they consider ending your agreement. If this point within your contract has not yet been reached, the funder will ask you to pay the difference. The vehicle must also be in a good condition otherwise you could risk having additional costs if it is returned poorly. 

If you are unable to keep up with the monthly payments and you have already made at least half of your monthly rentals already, you do have the right to early terminate your contract.

Can I end or change my PCH contract early?

When taking out a PCH contract, you are usually tied into the contract for the full term. There is the option to early terminate your contract however, these will always be associated with a cost which would need to be paid before they can end your agreement. 

Ending your PCH contract early isn’t always possible as it is down to the finance companies discretion to make this decision.

Mileage allowances on a PCP contract

By setting an annual mileage figure which is an accurate representation of the mileage you do in a yearly basis, this allows the finance company to estimate how much wear and tear there may be on the vehicle upon the end of the contract. This will then show how much the vehicle should be worth at the point of your contract being over and will reflect how much the monthly payments will be. 

The higher the mileage, the higher the monthly payment will be as it using this to estimate how much the vehicle will be worth at the end of contract. 

It is important that your mileage allowance is accurate to the mileage you do on annual basis as anything over this allowance will be charged an excess mileage charge upon the end of your contract.

Mileage allowances on a PCH contract

When choosing the right PCH contract for you, getting your mileage allowance correct is a key factor. Different mileage allowances will affect the monthly rental and strictly speaking, the higher the mileage, the higher the monthly rental will be. 

There will also be an excess mileage charge, should you go over the agreed allowance at the end of your contract.

PCP Vehicle maintenance

On a vehicle which is on a PCP contract, the vehicles GFV (Guaranteed Future Value) will bring into factor the maintenance/up keep of the vehicle throughout the contracted period. This will mean that the vehicle will be required to have a regular full manufacturer service history along with maintenance being carried when needed.

Most contracts will state that the vehicle does need to be serviced by a manufacturer approved garage/dealership but for clarification on this, check the small print within the contract or get in touch directly with the finance provider. 

If the servicing is done elsewhere and is not approved by finance provider or is serviced late, fines can be issued for the value of up to £1,000.

PCH Vehicle maintenance

When leasing a vehicle through PCH, vehicles are also required to be maintained fully under the manufacturers instructions including being serviced/maintained at a manufacturers approved garage. 

Maintenance packages can also be applied to your contract for an additional monthly cost on top of the agreed monthly rental. These packages do vary from supplier to supplier however, most will cover servicing, MOT (If applicable) and repairs or replacements caused by fair wear and tear. These could be things such as tyres, batteries, wipers or bulbs along with breakdown cover. 

This will vary and a full breakdown of what is included can be easily supplied by getting in touch with the relevant supplier.