Most of us aren’t in a position to put down the entire cost of a new car all at once, which may run into tens of thousands of pounds. For this reason, car finance is a hugely popular option, and can keep you in a new car without breaking the bank. Lots of manufacturers and leasing companies offer Personal Contract Hire deals, so here we take a look at exactly what this option entails.
What is PCH finance?Personal Contract Hire, also known as leasing, is where you get to drive a car for a specified period of time, which can be anything from two to five years. You usually get PCH finance on new cars, with a set mileage agreed in the contract. If you exceed this mileage, there are fees laid out for how much you go over. You never actually own the vehicle outright, as you hand it back at the end of the lease. It can be possible to make an offer to purchase the car, but this isn’t usually the case – most people decide to take out a new lease once the contract expires.
How does PCH work?The monthly payment you make on your contract effectively covers the drop in your car’s residual value. Finance companies calculate what the car’s going to be worth at the end of your lease, and you pay the difference between that and its on-the-road price when new. It’s common to pay three months up front as an initial deposit, which means the initial outlay isn’t too big. You’ll often see PCH deals advertised as 3+23 or 3+35, which means three months up front followed by 23 or 35 monthly payments. You can increase the initial deposit if you’d prefer to keep the monthly payments down, with something like a 6+23 or 9+35 contract instead.
Who is PCH finance suited to?If you want to drive a new car every few years, PCH could be a great option for you. You’ll often be covered by your car’s manufacturer warranty for the duration of your contract, while problems are less common with new vehicles. The service and maintenance costs are cheaper too, so there are savings compared to the running costs associated to owning an older car. When it’s time to change your car, you simply hand it back to the finance company, which means there’s no hassle with respect to selling it. You also don’t need to worry about the drop in value, as your monthly payments are fixed and not subjected to fluctuations in the car industry.
What is included in PCH?It’s important to note that the only thing your PCH lease covers is the cost of the car. You still have to pay insurance like you would on any vehicle, and for any MOT fees once they become due. Usually, road tax is included throughout the duration of your lease. You do have to pay for any service, maintenance and repair costs if necessary, though. Most finance companies and manufacturers providing PCH deals offer packages where you pay a set monthly amount to cover servicing and maintenance, which can help to spread the cost if your car does need any work carrying out.
What are the benefits of PCH?
- It can be a cost-effective way to keep yourself in a new car.
- You don’t need a big deposit or bank loan.
- There’s no MOT to pay if your lease is for three years or less.
- Road tax is covered for the duration of your contract.
- Flexible contract lengths ranging from 24 to 60 months.
- Mileage is also flexible to suit your personal needs.
- You’ll have fixed monthly repayments, although they may be subject to rises in VAT.
- There’s no need to worry about losing money on the car’s value.
- There’s no compulsory balloon payment at the end of the lease.
- You’ll simply hand the car back at the end of your contract.
What are the risks of PCH?
- Excess mileage fees could be substantial if you go far beyond your agreed limit.
- The mileage can’t be changed at any point during the contract.
- There can be high costs involved if you want to terminate the lease early.
- You may be charged for any damage to the vehicle beyond what’s classed as fair wear and tear.
What other finance options should I consider?If you decide PCH doesn’t sound right for you, there may be another finance option that’s more suitable.
Personal Contract Purchase (PCP)This is a very popular way for people to finance a new car. It can be more flexible than PCH, as there’s a balloon payment set at the end of the contract. Sometimes this is optional, giving you the choice to own your car at the end of your contract. You’ll need a decent chunk of money to pay the final payment, but you could decide to sell the car and use the money to pay off your PCP contract. It can be easier to hand a car back early with PCP, in contrast to PCH deals where you’re obliged to keep a vehicle for the whole duration of your lease. You can also avoid excess mileage charges and any penalties for damage by purchasing the car at the end of your PCP contract.
Hire Purchase (HP)With a Hire Purchase, you usually pay off the total value of the car in monthly instalments. You can specify how much you put down as an initial deposit, with the remainder of the car’s value spread over the duration of your contract. This means you aren’t left with a large balloon payment at the end of the term, like you are if you go down the PCP route. However, the compromise you make is that your monthly payments are likely to be significantly higher.
Personal Loan (PL)Some lenders offer excellent rates on personal loans, which can be great for buying a new car with. You may find that the total amount you pay back is less than with a PCP contract where you take up the option to buy the car at the end of the term. You also own the car outright while you pay off the loan, which is different to a PCH where the finance company always owns the vehicle. You don’t have to worry about things like excess mileages, while you could also pay some or all of the PL off early without major penalties.
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