What is Personal Contract Hire (PCH)?

  • PCH leasing effectively works like long-term car rental
  • Drive a car for the contract term and then hand it back
  • Unlike PCP there is no option to buy the car outright

Personal Contract Hire (PCH) - also called leasing - works much like a form of long-term rental. Put down a deposit (known as an initial rental), pay a series of monthly payments, then when your contract is up, you simply return the vehicle and start again.

At a time where finance makes up more than 90% of new car sales, many people are switching to PCH agreements in particular as they are the simplest way to get a new car on your driveway. There's no option to buy the car outright, so there's no agreed value and no dealer calling you towards the end of your contract with a 'once in a lifetime' deal.

The way it differs from other types of car finance agreements such as Personal Contract Purchase (PCP) or Hire Purchase (HP) is that there's no chance of owning the car. This is the reason why PCH agreements generally offer the lowest monthly payments - because the finance company you're signed up with has usually already agreed a price to sell the car you're driving.

On the flip side, it means at the end of the contract you need to find a new car. It also means you haven't built up any equity. When you take out a PCP agreement, often you'll build more value in the car than the outstanding balance, and this can be put towards the deposit on a new car.

PCH agreements are very simple in nature and you can tailor them to suit your needs. Set the initial payment to what you can afford, how many miles you'll cover in a year, and finally, pick how long you want it to last for, and voila, your monthly cost will be ready.

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PCH pros & PCH Cons

PCH pros

> Cheapest monthly payments

> Easiest way to drive a new car

> Enables drivers to change cars every few years

PCH cons

Not the cheapest in the long-run

> Need to pay an initial payment with each new contract

> Usually only available with a good credit score 

How Personal Contract Hire works

The too long didn't read version of PCH can be broken down into three steps:

> Initial payment. Typically worth 3-12 monthly instalments. You can choose how much you want to pay. Generally, the more you pay up front, the less the monthly payment will be

> Fixed monthly payments for the course of the agreement

> Hand the car back

PCH car leasing vs PCP finance: finance options explained

Where leasing a car on a Personal Contract Hire deal differs from PCP - the most popular form of new car finance - is in the way you don't have the choice to buy the car at the end of the contract.

What is PCH?

As a large proportion of drivers with cars on PCP return the car and get a new finance deal rather than making the optional final payment to buy it, many drivers considering PCP could be wise to consider PCH leasing, too.

To get a PCP deal on a new car, you normally have to go through the manufacturer, but many PCH deals are available through external leasing companies, meaning you have much more choice. As a result, you can often find affordable leasing deals if you do your homework; it's not unusual for the best lease offers to come in at around half the monthly payment of a similar PCP scheme through your local dealer.

Don't forget that many manufacturers offer their own leasing deals, too, so if you're open to PCP and leasing it's worth comparing the costs for the specific models you're looking at while visiting the dealership.

While some of these are great value, however, others are pricier than the equivalent PCP agreement, so it pays to research the deals available before choosing a car and finance deal.

If in doubt, ask the dealer to provide you with comparable leasing and PCP quotes - with the same upfront payment, contract length and mileage allowance - so you can directly compare the costs.

BMW 2-Series Gran Coupe

Car leasing: Personal Contract Hire agreements lacks flexibility of PCP finance

As there is no option with leasing to buy the car at the end of the scheme, PCH only suits those who plan to move onto another finance contract afterwards and have the funds to cover a new initial payment at that stage. Or those who can pay cash for their next car, or are happy to walk away without a vehicle.

If you want the option to hand the car back ahead of time if you don’t gel with it you might want to look at PCP instead, as this gives you greater consumer rights protection, meaning it is far easier to return the car early if it no longer meets your needs or if your circumstances change and you are not able to meet the monthly payments.

>> How to return a car on PCP early

Car lease damage

In comparison, with leasing you are committed to running the car for the full contract - and making all of the monthly payments - whether your circumstances change or not. As a result, if you're concerned that you won't be able to afford monthly payments, if anything were to happen, PCP might give you some extra peace of mind.

Bear in mind, however, that if instalments for the car you're considering are much lower with leasing than PCP you'll be less likely to encounter problems making payments, so it's worth mulling all of this over before making a decision.

PCH: car leasing subject to excess mileage charges and damage fines

As you have to return the car to the leasing company at the end of a PCH deal you will have to abide by mileage and condition rules (as with PCP deals where you return the car when the contract ends). Therefore, if you damage the car or exceed the agreed mileage limit, you can expect to be stung with additional charges.

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Car lease

These can be substantial, with as much as 30p - or even more in a few cases - being charged for every single mile you go over the agreed limit. Additional charges can be issued for any damage you cause to the car.

>> How excess mileage charges can cost you

Yes excess mileage and damage charges are issued at the end of contract hire agreements and PCP deals, but with PCP agreements there are several ways to avoid, or minimise the cost of expensive charges, including purchasing the car for the pre-agreed optional final payment or effectively trading the car in with another dealer that then pays off the finance and sells the car on itself.

Further reading:

>> What is PCP car finance?
>> What is HP car finance?
>> Car leasing with insurance included - what you need to know
>> Explained: leasing from the comfort of your home
>> Ranked and updated: the best car deals