Why you shouldn’t be afraid of PCP and PCH

Here at Intelligent Car Leasing, we like to feature content that is interesting and informative to read. That’s why we wanted to clarify the difference between PCP (Personal Contract Purchase) and PCH (Personal Contract Hire), as writers in the mainstream press are not only confusing terminology but suggesting PCP is leading consumers into unwanted debt.

We’ve had enough of this confusion, and thought we’d explain why these products are effective ways of financing your next car, with little risk and why they shouldn’t be confused – because they are quite different products, even though their acronyms are very similar.

Personal Contract Purchase (PCP) first then.

This is a really useful product, as it gives buyers more alternatives — even if they don’t end up buying the car at the of the purchase agreement. How? Well, because a PCP offers more flexibility.

With a PCP, you pay the deposit up front you’ll then get a guaranteed future value of the car at the end of the term (which can be two, three or four years away).

The set amounts you pay basically cover the depreciation of the car (retail price minus deposit) plus finance costs to its guaranteed future value. To sum up PCP, you don’t pay the full price of the car from the start, unlike HP. As a result, these monthly payments are significantly lower.

Stick to your set amounts you pay over the agreed period, and you’ve got a choice what happens next — and this is where the PCP’s flexibility comes into play. Either choose to pay the final ‘balloon’ amount (the remaining cost of the car) and it’s yours; or take on a new agreement for another car using any excess value as a deposit; or, if the guaranteed future value is below the stated amount (if, for example, used car values have dropped more than predicted), just walk away with nothing owed.

What about the value of the car, I hear you ask? What if the value goes down during the time I have the car? Well, because the value of the car (the asset) is underwritten by the finance company — there’s no risk to you the consumer.

So, it’s the finance company that takes the hit — not you, so you could return the car and buy a cheaper second hand one; or start another PCP agreement. Up to you.

Most important to remember, is that a PCP is not a lease — as this is where all the confusion in the mainstream press has come from — so those monthly payments are not in fact lease payments.

The only downsides to PCP are perhaps its greatest strength – the flexibility – but the different choices at the end of the agreement could be perplexing; plus you have to keep the car in good nick; and you must stick to the agreed the mileage — as if you exceed that, and decide to hand the car back there will be excess mileage to pay..

You also get a lot of consumer protection thrown in — a PCP is covered by the Consumer Credit Act of 1973 and is a regulated product by the Financial Conduct Authority.

So what about Personal Contract Hire (PCH)?

What to do if you don’t want to buy a car, but instead just want to use it, then give it back at the end of a set period (subject to certain terms and conditions)? Then PCH could be the type of long-term rental that will work best for you.

How I hear you ask? Well, a Personal Contract Hire (PCH) agreement, basically means you lease the car for an agreed period of time and mileage, by making fixed monthly payments that are outlined before any paperwork is signed. You usually pay between three to six months’ rentals in advance when you start the lease. Then, at the end of the contract, the car is returned, then you can take out a new contract on a new vehicle, should you wish — there’s no balloon payment.

Downsides are that once you’ve started an agreement, there’s little flexibility to change it — so a change in personal circumstances equalling more mileage, could see you liable for excess mileage payments.

Condition of the car is important too like the PCP, so you’ll be charged for repairs to items such as kerbed alloy wheels and scratches, although what you are charged for is overseen by the BVRLA.

Once again, there is consumer protection included. Personal Contract Hire is regulated by the Financial Conduct Authority.

Summary

So after all this talk of PCP and PCH, is a straight HP (Hire Purchase) agreement a better option? Not, in our opinion.

You’ll be paying higher monthly payments for HP than PCP or PCH, as you’re paying off the full value from day one. Finally, until the finance is settled, the car is not yours, so you cannot sell it as title to the car does not pass to you until the final payment has been made.

Finally, PCP and PCH gives you the chance to drive newer vehicles on a more regular basis and with this all the benefits that entails, including the latest safety technology, more affordable lower emission models, and all the latest technological advancements, with fewer unexpected maintenance bills and an environmental upside of getting greener cars on the road.