If you are in the market for a new car, you might be looking at a ‘monthly instalment’ plan. This is where you pay a monthly fee for a vehicle, and then depending which plan you go for depends on what happens at the end.
You have a few options available to you. But, what are they? And what is the best option for you?
In this article, we give you the lowdown on each leasing option, what it entails, and hopefully help you decide which one is right for you.
What leasing options are there?
There are three instalment plan options available to you, otherwise known as finance schemes. These are;
- Personal Contract Hire
- Personal Contract Purchase
- Hire Purchase
And we’re going to go through each of these and their advantages and disadvantages in this article.
What is Personal Contract Hire?
Personal Contract Hire is essentially a fixed-term contract whereby you make regular monthly payments to use a vehicle over a set period of time. This is usually two or three years but is sometimes longer. When the contract is up, you return the car with nothing more to pay (subject to mileage and condition restrictions).
The amount you pay each month is based on the ‘residual value’ of the vehicle. The residual value is the predicted value at the end of the contract period. The monthly cost is determined by taking the purchase price of the vehicle, the residual value, and working out the difference. That difference is then divided by how many months you are going to have the contract for.
What are the upsides to Personal Contract Hire?
Some of the advantages to Personal Contract Hire include;
- The fact that you know exactly where you stand as far as payments are concerned
- The price is fixed and is not affected by fluctuating interest rates.
- Road Tax is often included in the price as well
- This makes for easy budgeting
- Low initial outlay
- The deposit required is generally much lower than with purchase options
- This is typically the equivalent of about three to six monthly payments
- Relatively low monthly payments
- Because you are only really paying for the depreciation, Personal Contract Hire tends to be cheaper than other agreements where you are paying for the whole car
- Optional maintenance add-ons
- You usually have the choice of a maintenance package so you don’t need to worry about the general upkeep of the car
- This covers all the servicing costs for the duration of the contract
- You get a new car every few years
- You don’t have to worry about getting rid of the vehicle or selling the car on
What are the downsides of Personal Contract Hire?
However, there are some disadvantages, they include;
- The fact that you won’t own the car
- You hand the car back instead of keeping it
- You are subject to mileage and condition restrictions
- You agree to a set-mileage at the start of the contract and you also have to keep the vehicle in a condition which is in line with the BVRLA Fair Wear and Tear Guide.
- If you do not follow these guidelines then you could face additional charges
- You have to get fully comprehensive insurance
- Because you don’t own the car the finance house sees you as a larger risk. Therefore, you have to have fully comprehensive insurance.
- This can cost more than third-party, so is something that you will have to take into account when looking at your budget.
Watch the video on Personal Contract Hire below.
What is Personal Contract Purchase?
Personal Contract Purchase is similar to Personal Contract Hire but you have more options at the end of the contract;
- Hand the car back
- Purchase the car
- Part-exchange the car
At the beginning of the contract, you are given a ‘Guaranteed Future Value’ or the GFV, or sometimes called the balloon payment. If you choose to buy the car at the end, then you will pay the GFV and then the car is yours to keep.
What are the upsides of Personal Contract Purchase?
There are some big advantages to Personal Contract Purchase including;
- The fixed monthly payments
- Low deposit
- Flexibility at the end of the agreement
- You don’t have to decide what you want to do with the car until towards the end of the contract so you have plenty of time to decide whether you want to buy the car or hand it back.
What are the downsides of Personal Contract Purchase?
However, there are some downsides. These include;
- If you hand the car back then you are still subject to mileage and condition restrictions
- It can be more expensive than Personal Contract Hire
Watch the video on Personal Contract Purchase below.
What is Hire Purchase?
A Hire Purchase is actually a purchase scheme but it shares some of the same characteristics as a lease agreement.
You pay a fixed monthly fee for a set period of time, up to five years, and once that time is up then you own the car. It’s a great way of staggering the cost of a brand new car.
What are the upsides of a Hire Purchase?
There are plenty of advantages of a Hire Purchase, including;
- The fact that it’s a great way of owning a new car without having to pay a lump sum upfront
- It’s good if you want to stagger the cost
- It often comes with higher acceptance rates than other forms of credit
- The loan is secured against the car
- Flexibility variations
- You have a lot of control over how much you want to put down, if you want a balloon payment and how long you want the contract for
What are the downsides of a Hire Purchase?
However, it is not for everyone. Here are some of the disadvantages.
Watch the Hire Purchase video below.
Hopefully this has given you some idea of the different options available to you. Our vehicle specialists are SAF Approved, which means that they know everything there is to know about all the lease options above. If you have any questions, or need some advice in choosing the right option for you, then don’t hesitate to contact us.
- Tax benefits and implications of business car leasing - 8th April 2021
- Business car leasing eligibility - 7th April 2021
- Business car leasing credit requirements - 6th April 2021