PCH meaning: what is Personal Contract Hire?

Personal Contract Hire (PCH) is a form of vehicle leasing that works like a form of long-term rental. Make an initial payment (usually 6-12 months of the monthly amount), then monthly payments for a specified period of time – two, three or four years is common – and just return the car to the leasing company at the end of the contract.

What is Personal Contract Hire?

PCH is known as a contract hire agreement, because you’re hiring the car for the duration of a contract. It’s a form of leasing, so there’s no opportunity to purchase it at the end of the agreement.

Businesses offering company cars to employees often arrange contract hire agreements, with the benefit to them that VAT is excluded. Private individuals can also take out a PCH agreement, but they will have to pay an extra 20% in VAT.

The attraction of a PCH lies largely in drivers being able to renew their car every few years, with payments often lower than other forms of financing. However, as with those other forms of financing, it’s crucial that you understand how it works, including any potential pitfalls, before signing on the dotted line.

The thing to remember is that after the term of the agreement, you’ll have no car, no equity in a car (as can often happen with PCP agreements) to put towards the next one.

You should also be prepared for a PCH to cost you more overall than financing a similar used car over the same period, which is likely to have a much lower initial price.

There are lots of financial decisions to be made when buying or leasing a car, so make sure you fully understand how PCH works and why it’s your best option.

How does Personal Contract Hire work?

Eligibility

You’ve found the car you want to lease, so before you sign any kind of financial agreement, you’ll have to undergo a credit check. However, the checks for PCH deals tend to be less stringent than for a PCP, HP, or personal loan to finance the car.

First payment

Your initial payment will be equal to anywhere from three to 12 months of regular payments. You will choose the amount you want to pay upfront, but bear in mind that the more you pay upfront, the lower your regular monthly instalments will be.

Monthly payments

You’ll then make monthly payments for as long as the term of your agreement. Again, you can often choose how long this is at the start of the process, but most PCH deals tend to last 24, 36 or 48 months.

Hand the car back

At the end of the PCH agreement, all you have to do is return the car to the finance company. There’s no option to buy the vehicle outright, but you might be able to extend the PCH, if the leasing company agrees. You must return the car with all original documents and in good condition: you will be liable for any damage considered to be above and beyond general wear and tear.

What are the pros and cons of Personal Contract Hire?

Pros

• Straightforward. A PCH is a relatively easy form of financing a new car. Pay the initial rental, then the set monthly payments and you’re good to go.
• Cheapest deals. With PCH deals, you should expect to be offered the lowest monthly payments for any kind of new car financing.
• Depreciation. If the car that you’re leasing loses more value over the term of the agreement than expected, there’s no additional financial penalty to you.
• No hidden extras. Under a PCH agreement, all servicing and maintenance costs can be included, so there are no unexpected extra payments to make.

Cons

• Extra charges. The rules around PCHs can be quite strict, so if you cause any damage to the car – and the hirer may well check it with a fine toothcomb when they pick it up at the end of the agreement – then you could be liable for additional charges to repair the car. You’re also limited to a set annual mileage and, if you cover more miles than agreed, you will have to pay a fee per mile, which can be large.
• No ownership. With PCH deals, there is no option to buy your car at the end of the contract, so you’ll have to look for something else, no matter how much you love your leased car.
• Only new cars. PCH tends to be a form of financing for new cars, so you don’t often see it as an option for used cars, And on those rare occasions where you can finance a used car using PCH, it tends to be costly.
• Going the distance. It can be difficult and expensive to end a PCH deal before the agreed term, so if there’s a chance that you might not want to lease for the length of the agreed term, you might want to think of another form of financing.

Is Personal Contract Hire right for me?

If you’re not interested in owning a car outright, and are happy to hand it back to the finance company at the end of the term, Personal Contract Hire is likely to be a good option for you.

If you have a problematic credit history, a PCH is also likely to be your best option. You might find fewer lenders, compared to someone with a clean credit history, and you’ll probably have to pay higher interest rates, but you should be able to find a funder.

A PCH can also be tailored to suit your circumstances, so you should be able to arrange a deal that works for you. For example, you can adjust the initial payment before the car is delivered, along with the length of contract and the mileage – all of which will affect your monthly payments, of course.

PCH is also generally only available on new cars. If you’re after affordable monthly payments – and the option to cut costs further by choosing a used car – then Personal Contract Purchase (PCP) finance might work for you. PCP gives you the option to return the car at the end of the agreement – as you would have to do with a lease – or you could choose to buy it at that stage for the pre-agreed optional final payment.

If the value of a car suddenly falls – as was the case with VW diesel cars when it was revealed the company had been cheating on official efficiency tests, for example – then having a PCH will work in your favour. In this instance, the leasing company, as the owner of the car, would take the hit of a lower used value when selling it after your agreement is finished.

However, a PCH isn’t right for everyone, which is when you need to consider alternative funding options.

PCP is another way of financing a car, but unlike a PCH, a PCP also includes an option to keep the car at the end of the agreement. The payments for a PCP are based on the difference between the purchase price of the new car and what it will be worth at the end of the agreement. That means you’re essentially paying the ‘asset’s’ (the car’s) depreciation.

At the end of a PCP term – again, usually two, three or four years – you have three options. You can hand the car back, only paying for any extra mileage or damage; you can keep the car by making a ‘balloon’ payment, which will be based on the car’s set guaranteed future value (GFV); or you can trade the car in against a brand new one, using any GFV equity as a deposit. It’s worth noting that four out of five people with PCPs don’t buy the car at the end of their contract.

Another financing option is Hire Purchase (HP), which is a flexible way of financing a car for those who want to keep the vehicle at the end of the agreement. Over the term of the HP agreement, you’ll be the registered keeper and responsible for any maintenance, repairs, etc. However, the finance company is the car’s legal owner until you’ve made the final payment. Cars bought using HP also won’t have mileage restrictions and the term of the agreement can be as long as five years.

Personal Contract Hire FAQs

Can I buy the car after my Personal Contract Hire agreement has ended?

The answer is generally no, because of the way the financial agreement has been set up by the leasing company (which is the legal owner), which has HMRC and VAT implications. However, every lender has a different policy and some do have arrangements with remarketing companies that enable you to buy the car.

Can I cancel my Personal Contract Hire agreement early?

Life has a habit of throwing us curveballs, so there could be many reasons why you might want to cancel a PCH agreement. But can you?

PCP and HP agreements are required to have ‘voluntary termination’ clauses, but this is not the case with a PCH, so ending a lease early is usually at the discretion of the lender. The agreement’s documentation will contain details of the lender’s cancellation policy, so it’s worth checking it before speaking to them. If you still want to cancel, contact the lender first and come to an agreement: if you just stop making payments, the agreement won’t be cancelled and your credit score will take a big hit.

What happens if I can’t keep up with my Personal Contract Hire payments?

While there’s no formal way of returning a car leased using PCH, if you can’t keep up with your monthly payments, it’s worth speaking to your finance company. They might be able to help: an early settlement, for example, might enable you to pay a percentage of the remaining monthly payments, which could be a better long-term financial decision.

What’s the difference between PCH and PCP?

The main difference between Personal Contract Purchase and Personal Contract Hire agreements is that a PCP deal offers you the chance to buy the car. There’s no such option with PCH.

Another difference is that while PCP deals on a new car normally go through a manufacturer, many PCH deals are available through external leasing companies, offering you much more choice. This means affordable leasing deals are possible if you do your homework. Indeed, the best lease offers can come in at around half the monthly payment of a similar PCP scheme.

If you want the option of handing the car back ahead of time, you might want to look at a PCP, because this gives you greater consumer rights protection. The result is that it’s easier to return the car early if it no longer meets your needs, or if your circumstances change and you can’t make the monthly payments.

With a PCH, on the other hand, you’re committed to paying for the car for the full term of the contract. If there’s a chance that your circumstances might change, leaving you unable to afford monthly payments, a PCP offers extra peace of mind.