Car Finance Explained - PCP or PCH?05 June 2017
Although only one letter apart in their names, these two forms of finance have quite different implications for the way you will manage your motoring throughout the lifetime of the contract. The two products are amongst the most popular ways to buy a new car in the UK, but unfortunately sound understanding of how each of them work is not as widespread as it could be. Both arrangements require the customer to specify an annual mileage and contract term (generally 24 to 48 months) then put down an initial payment and settle monthly rentals, but when it comes to the end of the term your options will differ. Chances are if you don't have the cash to buy a new car outright you'll use one of the two so we've put together this helpful guide to help you choose what's best for you.
Personal Contract Purchase
PCP is a relativity new way of getting a car, these deals have only really become popular over the last decade or so. The main difference between paying for your vehicle in this way and with PCH is that you have the option to buy the car at the end of it, however this will usually prove more expensive than if you bought the vehicle using a hire purchase (HP) arrangement. To begin with you need to pay a deposit upfront when you take the car, which will typically be between 10-20% of the vehicle value, this tends to be a larger amount than you would be looking at for the same vehicle on a PCH. Similarly, your monthly payments will usually be higher for a PCP and you will usually also need to fork out for your road tax (VED) each year too, whereas this is included within your PCH payments.
The advantage of a PCP deal is that customers have the opportunity to purchase the vehicle at the end of the term for a previously agreed price known as the minimum guaranteed future value or balloon payment. Sometimes the vehicle may be worth more at this point than the agreed amount and any equity available in the deal can be put towards the deposit on a new vehicle. In reality this equity has been built up due to higher initial and monthly payments than would have been paid on a simple hire deal that purely covered the vehicle's depreciation costs.
- Opportunity to buy the car at the end of term
- Possibility that there may be equity built up in the car's value to put towards a new vehicle
- Usually pay a larger initial and monthly payments than PCH for the same vehicle
- Need to pay for road tax (VED) on top of payments
- Unpredictable nature of possible equity makes it difficult to plan finance for your next vehicle
Personal Contract Hire
Traditionally contract hire was more widely used for company cars and fleets, but over recent years these arrangements have been made available to the public and their simplicity has proved extremely popular with consumers. In fact the personal contract hire market grew 41% in 2016 and is now larger than business contract hire. As with a PCP, customers must decide the length of contract they want and the annual mileage they require, pay an initial rental and then cover monthly rentals throughout the contract term. At the end of the arrangement the customer simply hands the car back, with none of the complication or risk involved with the promise of possible equity which can be affected by any number of external factors that cannot be predicted.
As mentioned earlier, the road tax is included within your payments providing the user with fixed monthly cost motoring for the duration of the lease period. There is also the option of taking a maintenance contract that will cover breakdowns, punctures, services and replacement tyres for that extra peace of mind.
- Cheaper initial and monthly payments than PCP
- Predictable costs throughout contract and no grey areas with possible equity
- At the end of the term simply hand the car back
- No opportunity to buy vehicle at the end of the term