One of the biggest decisions you will make when it comes to choosing a new car is what sort of finance agreement you are going to get.
We get asked quite a lot about the differences between personal contract purchase and personal contract hire. It’s understandable, they are quite similar. However, there are some key differences that could be the decider in which agreement is best for you.
So, in this article we’ll be looking at what personal contract purchase is, what personal contract hire is, and the main differences between the two.
What is personal contract purchase?
Designed for private individuals, personal contract purchase (PCP) offers more flexibility than other agreements.
In a PCP agreement, you make fixed monthly payments for a period of time, usually between 2 and 4 years. At the end of that contract, you have three options;
- You can hand the car back (subject to mileage and condition restrictions, but more on that later)
- You can buy the car for a pre-agreed value (again, more on that later)
- Or, you can part exchange the car. Once the finance has been cleared, you can use any equity to go towards the deposit of your next car.
What is personal contract hire?
So, what is personal contract hire, then?
Personal contract hire (PCH) is extremely popular, over 70% of our lease contracts are personal contract hires.
Essentially, a personal contract hire agreement allows you to have your car for a set period of time, between 1 and 5 years. You pay a monthly fee for the length of the contract. Once this time is up, you hand the car back with nothing else to pay (as long as you stick within the conditions of the agreement, of course)
What is the difference between personal contract purchase and personal contract hire?
The main difference between the two is that with a personal contract hire, you do not own the car.
In a personal contract purchase*, however, you have the option to own the car at the end of the contract.
What are the pros and cons of personal contract purchase?
Before you decide which agreement is best for you, it’s best to weigh up the pros and cons of each.
So, what are the advantages of a personal contract purchase?
- This is probably the most attractive thing about personal contract purchase.
- The contract is much more flexible than other agreements. You also don’t have to decide what you want to do straight away. You tend to have about a month before the agreement ends before you decide what you want to do with your car.
- You agree the end payment at the beginning of your contract
- If you choose to buy your car, you will be paying the Minimum Guaranteed Future Value. This is how much the finance house expects the car to be worth at the end of the contract.
- Because this is decided at the beginning of the contract, should you wish to buy it you know exactly how much it will cost. Therefore, you can budget accordingly.
- You can hand the car back
- If you don’t want to buy the car, you can just hand it back. So long as you keep within the mileage and condition restrictions, but more on that in a bit.
However, there are some disadvantages to personal contract purchase. For example;
- If you decide to hand your car back, you are still subject to mileage and condition restrictions.
- If you want to hand the vehicle back and it’s within the agreed mileage and kept in good condition then job done.
- However, if you have gone over the agreed mileage then you will need to pay an excess mileage fee. This can be anything from 1p to £1 per mile. You can read about excess mileage charges here.
- If you hand your car back and it is damaged, you will be charged for the repair.
- Personal contract purchase tends to be more expensive than personal contract hire.
- The interest rate tends to be higher than if you were to get a hire purchase. You can read more about hire purchase here.
- You are responsible for taxing the car
- When you lease, the tax is included, but it isn’t with a personal contract purchase.
- It may affect your credit score
- This is because the full cost of the vehicle is shown on your credit file.
What are the pros and cons of personal contract hire?
We’ve looked at the pros and cons of personal contract purchase, now what are the advantages and disadvantages of personal contract hire?
Some of the advantages of this type of agreement are;
- You don’t have to worry about depreciation
- Because you aren’t having to dispose of the vehicle yourself, depreciation is not something you will have to worry about.
- There’s no risk of negative equity
- Again, because you aren’t responsible for the disposal of the car.
- You can get a nicer car for less money
- Monthly payments on personal contract hire are significantly cheaper than personal contract purchase. Because you are paying for the depreciation, an Audi could cost the same a month as a Peugeot. Seriously. You can read our article on getting the best lease deal here.
- They are also fixed payments, which makes for easier budgeting.
- Road tax is included
- Unlike personal contract purchase, road tax is included in the contract. This is again, because you don’t own the car and therefore are not liable to keep it taxed.
But, there are disadvantages to personal contract hire. Those are;
- You don’t own the vehicle
- This is subjective. Some people see this as an advantage and some do not. If you want the option to own your car at the end of the contract, then personal contract hire is not for you.
- You are subject to mileage and condition restrictions
- When you have a contract hire car, you have to keep within a pre-agreed mileage. If you go over this, then you will incur excess mileage charges. You can read all about excess mileage charges here.
- You also have to keep the car in good condition. Obviously, we’re sure you will. However, it will have to be kept to the BVRLA Fair Wear and Tear standard. Your broker or dealership should provide you with this guide. If it doesn’t meet that standard, then you could incur extra charges.
Personal contract purchase Vs. Personal contract hire; which will get me the best deal?
So, you’ve weighed up the pros and cons and now you want to know which one will get you the best deal.
It depends on your individual situation, really. There’s nothing to say which contract will get you the best deal because there are so many things that affect how much each contract costs.
It also depends on what you define as a good deal. For example, personal contract hire may get you the best deal because you want a nicer car for less money. Alternatively, you might find a great deal on a car on personal contract purchase that you plan on buying at the end of the contract. It’s all down to your situation. That said, if you go through a reputable broker with a large network of finance houses and manufacturers at their disposal, you’ll be able to get a great deal whatever agreement you choose.
Hopefully this article has informed you of the differences between personal contract purchase and personal contract hire, and shed some light on which contract is best for you. While there are similarities to the two, they do have their stark differences and it’s important that you think about these carefully before making a decision. If you are in doubt, speak to an expert.
* As an example, a representative APR for a PCP would be 5.5%, however, this may vary.
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