Car leasing jargon
Approaching a new topic for the first time can be daunting, and car leasing is no different. And one of the most daunting aspects of car leasing can often be the amount of jargon that is thrown about. PCP, HP, wear and tear, so many acronyms and phrases that aren’t always known outside of the automotive world.
But, it doesn’t have to be daunting or confusing, and at OSV, we want you to be as knowledgeable as possible before beginning your car leasing journey. So in this article, we are going to go through the most commonly used phrases and acronyms in the car leasing industry, and what they mean.
While car leasing has become more popular as of late, it still hasn’t really made its way into the public domain. Not yet, anyway. This means that to most people, car leasing is a completely new concept. So, forgive us if we are starting with the basics.
Car leasing is essentially where you have a car for a set period of time, paying a fixed monthly fee with a set amount of miles. When that set period time is up, you hand the car back with nothing more to pay (subject to mileage and condition, which we will talk about further down). Then, you can start a new lease agreement with a brand new car. It’s almost like renting a car for a few years.
We will go into more detail about the different types of lease agreements below.
Contract Hire or CH
Contract Hire, or CH as it is sometimes known, is the most common form of leasing. It is for businesses, and is also known as Business Contract Hire or BCH.
Your business will have a car for a set period of time, usually between 2 and 5 years, paying a fixed fee monthly. Once that time is up, the car is handed back (subject to mileage and condition restrictions).
Contract Hire is what most people are talking about when they refer to leasing a car. You can watch our video on Contract Hire below for more information. https://www.youtube.com/watch?v=sZTKPhA-th8
Personal Contract Hire or PCH
Personal, or private, Contract Hire, or PCH, is the same as Contract Hire but for private individuals.
This means that if you are not leasing your car through a business, be it your own or an employers, then you will be leasing privately. There are a few minor differences between the two, and you can read our article on that here.
You can watch our video on Personal Contract Hire below. https://www.youtube.com/watch?v=Wxq1SJ0H-iA
Contract Purchase or CP
Contract Purchase, or CP, is a different form of agreement. It is for businesses, and is also known as Business Contract Purchase (or BCP).
Contract Purchase works like a lease in the way that you pay a fixed monthly fee for a set period of time. However, when that time is up, you have three options;
- Hand the car back with nothing more to pay
- Subject to mileage and condition restrictions
- Part-exchange the car
- Buy the car for a pre-agreed value
- This is called the Minimum Guaranteed Future Value, and we will go into more detail about the Minimum Guaranteed Future Value further below.
You can watch our video on Contract Purchase below. https://www.youtube.com/watch?v=ZPqgMrcEKIU
Personal Contract Purchase, or PCP
Personal Contract Purchase, or PCP, is similar to contract purchase but for private individuals.
You can watch our video on Personal Contract Purchase below. https://www.youtube.com/watch?v=CeEqF1IdFfs
This is the traditional form of leasing, and is for businesses. It is also more suited to those that are doing high mileage or will have vehicles that are going to be suffering from more than fair wear and tear (again, more on that later)
A Finance Lease works similar to a contract hire for the duration of the contract in the way that you pay for a vehicle for a set period of time. However, at the start of the contract you agree on something called a balloon payment. This is a slightly bigger payment that you pay at the end of your contract. When the contract is up, you have two options;
- Pay something called a peppercorn rental to continue your contract. This is a one off payment, usually the same as one monthly payment.
- Sell your vehicle to a third party to pay off the balloon payment. If you sell the vehicle for more than the balloon payment, then you get to keep the equity. However, if you sell it for less, then you will have to make up the difference.
You can watch our video on Finance Lease below. https://www.youtube.com/watch?v=y_cxGQzPLZw
Hire Purchase, or HP
A Hire Purchase, or HP, is not a lease agreement. It is a finance agreement. A Hire Purchase is where you pay a monthly fee for a car for a set period of time, usually up to five years. After that time is up, you own the car. You don’t get the option to hand it back, and there are no mileage or condition restrictions. It’s simply a way of staggering your payments for your new car.
You can watch our video on Hire Purchase below https://www.youtube.com/watch?v=7JPPSrsUZ54
When you lease a car, on either a Contract Hire or Contract Purchase, you will have a set mileage. This is usually anything from 5,000 miles a year to about 30,000 miles, depending on the manufacturer. You will agree the amount of miles before your contract starts.
If you go over your mileage, however, then you will be subject to an excess mileage charge. This can be anything from 2p/per mile to £1 per/mile, depending on the manufacturer. You will be charged at the end of your contract.
You can increase your mileage after the first year of your contract, but you cannot lower your mileage. You can read more about excess mileage and their charges here.
Fair Wear and Tear
When you lease a car, you will have to keep it in good condition. We are sure that you would, but if you do not, then you could face extra charges. However, there is some leeway, and that’s called Fair Wear and Tear.
Fair Wear and Tear is essentially what happens to a car when you drive it every day for a few years. When you first lease your car, you should be given a BVRLA Fair Wear and Tear Guide. This is the industry standard for what constitutes as fair wear and tear and what does not.
When you hand your car back at the end of your contract, it will undergo an inspection. If your car has damage beyond fair wear and tear, then you will face charges.
The BVRLA are the British Vehicle Rental and Leasing Association, and are the leading body for all things leasing and rental. They set the industry standard for Fair Wear and Tear and also offer mediation should you dispute the fair wear and tear charges.
They also lobby the government and ensure that their members are following their code of conduct. You can read more about the BVRLA and what they do here.
Minimum Guaranteed Future Value, or MGFV
We mentioned the Minimum Guaranteed Future Value above, and you will see this if you opt for a Contract Purchase or a Personal Contract Purchase.
The MGFV is how much your car will be worth at the end of the contract and how much the finance house expect to get for the car when it comes to reselling it after you hand the car back. If you wish to buy your car at the end of your contract purchase, then you will have to pay the MGFV to do so. There are a few things that affect the MGFV, including;
- The make of the car
- The model
- How many miles the car has done
- The length of the contract
- The cost of the vehicle
- How much the car has depreciated (more on depreciation below)
You will hear about depreciation outside the world of leasing, as this applies to every car, not just those in the leasing world.
Depreciation is essentially how much value a car loses while you drive it. Every car loses value when you drive it, but by how much varies. Some cars depreciate quicker than others. Depreciation can depend on a number of things including;
- The make and model
- Condition of the car
- Reliability (the more reliable the car is, the less it will depreciate)
- Service history
- Reputation or external factors
- For example, many thought that Volkswagen cars would lose their value in the light of the emissions scandal. This turned out not the be the case, but scandals and reputation can affect resale values.
You can read more about depreciation here.
Residual value is linked to depreciation, but they are slightly different. The depreciation is how much value your car has lost, whereas residual value is how much your car will be worth at the end of your lease contract.
So residual value only applies to lease contracts, as it is used to determine how much your lease payments will be, and also contributes to determining the Minimum Guaranteed Future Value.
So there are some of the phrases that you might come across when you are researching car leasing. This isn’t every bit of jargon, however, but these are the terms you are most likely to come across when you are researching car leasing. This is a growing list, and if you think there should be a term that we should add then comment below!