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Buying vs Personal Vehicle Leasing

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In recent years, personal contract hire has become one of the most popular ways to get your hands on a new or nearly-new vehicle, without having to pay the full market price for it.

When you think of vehicle leasing, the chances are you’re thinking of personal contract hire (PCH), which is a posh way of saying ‘personal car leasing’. Compared with other types of personal leasing and finance options such as personal contract purchase (PCP), lease purchase and hire purchase, it’s easy and straightforward to get your head around.

You pay a small initial rental amount, although you have the flexibility to choose how much this is. You then make fixed and affordable monthly payments for the duration of the contract, the length of which is also flexible as you can choose to lease a vehicle from 1 up to 5 years. Most people choose a period from 2 up to 4 years. You are never recognised as the registered owner, as the vehicle belongs to the finance company. Unlike some of the other vehicle leasing options, with PCH you hand the car back at the end of the contract.

With personal contract hire, you are normally driving a brand new or nearly-new vehicle, complete with the manufacturer’s warranty. It allows you to drive one of the latest models on the market at a fraction of its normal purchase price. It’s no wonder that PCH is increasing in popularity with UK motorists. In 2019, the BVRLA confirmed there was a 23 per cent increase in customers opting to use personal contract hire as a route to driving a new vehicle.

Personal Contract Purchase (PCP) operates in a similar way to PCH. As with a lease, monthly payments only cover part of the vehicles’ value – the amount it’s expected to lose in value throughout the contract. That means you get lower monthly payments in comparison with a traditional personal loan or HP deal. At the end of a PCP contract, you can return the car and owe nothing (apart from potential excess mileage or damage charges which might apply).

You also have the option with PCP of buying the vehicle for the remaining amount owed – an optional final payment which is sometimes known as a ‘balloon payment’. Or, if the vehicle is worth more than this final payment (known as equity) you can put this value towards the deposit of your next car.

Purchasing a car doesn’t mean you have to pay for it all upfront. Hire Purchase (HP) spreads the cost of the car over a deposit and a series of monthly payments. You become the owner once the final payment is made.

Our guide below explains three of the most popular ways for you to finance a new or nearly-new car.

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Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy the car at the end of your contract and won’t need to change the car before the end of the contract. You lease the car for an agreed period of time, typically 2 to 4 years and you pay affordable fixed monthly payments as well as an initial rental fee which can be anything from 1 to 12 months’ worth of rental payments. When the contract expires, you simply return your car.

Pros of PCH:

  • You get to drive new cars fitted with the latest in-car and safety technology that you may not be able to afford to buy
  • Your monthly payments will be much lower than if you were buying it
  • It’s hassle-free: at the end of the contract you hand the vehicle back and you’re free to lease a new car
  • There’s no depreciation or disposal risk
  • Flexible initial payment
  • Fixed-term contract from 1 to 5 years
  • Option to include maintenance with the contract

Cons of PCH:

  • No option to buy the car at the end
  • You will need to agree on an annual mileage allowance at the start of the contract – there might be an excess mileage charge if you exceed the allowance
  • You are tied into the full duration of the contract – early termination may be expensive
  • You must have fully comprehensive vehicle insurance
  • The vehicle must be returned in a condition that meets BVRLA standards

View our guide on Personal Contract Hire here.

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Personal Contract Purchase, which is most commonly referred to as PCP, is a flexible car financing option that can offer lower monthly payments than either a personal loan or Hire Purchase agreement. Essentially, PCP is a loan to help you purchase the car you want. It’s different from a normal personal loan because you don’t have to pay off the full value of the vehicle. PCP can be a good option for drivers who like to change their car regularly.

Personal Contract Purchase splits the cost of the vehicle into three affordable amounts – a deposit which is typically around 10% of the car’s price, monthly payments, and an optional final payment. You have until the end of the contract to decide whether you want to buy the car or not.

The optional final payment amount is decided at the outset of the agreement and it’s based on the approximate value of the vehicle when the deal ends – you might sometimes see this referred to as the ‘Guaranteed Minimum Future Value’ (GMFV).

You can choose to either pay the final optional payment if you want to keep the car or trade the car in for a replacement and begin a new PCP agreement, or simply give the car back with nothing more to pay, as long as you’ve honoured the terms of the agreement, and there’s no damage to the vehicle.

PCP differs from other finance options mainly because your monthly instalments are paying off the depreciation of the car rather than its full value. Essentially, you’re repaying the difference between what your car is worth now and what the vehicle will be worth at the end of the agreement, including interest.

It’s important to note that with PCP the loan is secured against the vehicle. So if you cannot keep up with the payments, you could lose the vehicle.

Pros of PCP:

  • The optional final balloon payment at the end of the contract means that you’ll only borrow part of the vehicle’s value, rather than all of it, resulting in lower monthly repayments than what you would pay through a Hire Purchase agreement
  • Flexibility – PCP gives you options – you can either pay the final balloon payment to keep the vehicle, return the vehicle and walk away, or give the vehicle back and take out a new PCP agreement on another vehicle
  • A guaranteed minimum future value – with PCP, you don’t have to worry about depreciation as the lender will provide a guaranteed minimum value at the start of the agreement. If your car or van loses more value than expected throughout the loan you can simply return the vehicle.

Cons of PCP:

  • Uncertain equity - If there is a negligible difference between the minimum future value and the actual value of the vehicle at the end of the agreement, you won't have much equity to use as a deposit on another PCP deal.
  • You don’t own the vehicle during the loan period – The vehicle won’t belong to you unless you decide to pay the final balloon payment at the end of the agreement
  • Charges to the vehicle – Similar to the Personal Contract Hire agreement, a PCP agreement will include excess mileage and damage penalty fees. If you want to return the vehicle at the end of the agreement, you may have to pay fees if you exceed the mileage and damage conditions agreed at the beginning of the loan.

View our guide on Personal Contract Purchase here.

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Hire Purchase (HP) is another way to finance buying a new car. You usually pay a deposit of around 10% and pay off the value of the in monthly instalments over a period between 12 to 60 months, with the loan secured against the car.

You don’t own the car until the very last payment is made, including paying the ‘Transfer of Ownership’ fee which is typically between £100 to £200 – this fee can vary so always check how much this would be. With hire purchase, it may also be possible to become the owner of the car earlier than agreed by making a lump-sum payment for the remainder of the loan.

Pros of Hire Purchase:

  • Flexible repayment terms (typically 12 to 60 months) to help fit around your monthly budget. However, the longer the term the more you’ll pay in interest
  • Relatively low deposit required (normally 10% of the car’s value)
  • Fixed interest rates - you’ll know exactly what you’ll be paying each month for the length of the contract
  • It does not usually come with mileage restrictions
  • If your credit score isn’t that high it may be easier to get hire purchase than an unsecured loan, as the car is used as collateral for the loan

Cons of Hire Purchase:

  • You don’t own the car until you’ve made your final payment, which means if you run into financial difficulties the finance company could take the vehicle away
  • You can’t sell or modify the vehicle over the agreement term without getting permission first
  • It can be an expensive choice if you want a short-term agreement
  • Until you’ve paid a third of the total amount payable the financial provider can repossess the car without a court order
  • Monthly payments can typically be higher than for PCP and Personal Contract Hire deals

View our guide on Hire Purchase here.

If you need any advice on which option might be best for your circumstances please call us on 02392 245572.

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