What Are The Differences Between PCP and PCH Car Leasing?
Most people have a working knowledge of vehicle leasing basics. You pay the leasing company a fixed sum of money every month and, in return, you get to drive around in a new car. Under most agreements, you don’t own the car outright – but you’re otherwise free to drive it whenever you like, with some restrictions.
The car lease market, however, can be a little confusing. Dealers will often use industry jargon when talking about different types of leases, making it hard to understand what you’re signing up for. In this post, we’re going to discuss the difference between PCP and PCH car leasing and how they work.
What’s The Difference Between PCP and PCH Car Leasing?
In the car leasing world ‘PCH’ stands for personal contract hire. Here you pay the dealership a rolling monthly fee. In return, they provide you with a car you can use as a regular vehicle, without having to worry about the resale value. Once the lease comes to an end, you hand back the vehicle of which the dealer will go on to sell, leaving you to start the process again with another new car, should you wish.
‘PCP’ stands for personal contract purchase. This payment structure works in the same way as personal contract hire, except you have the option to buy the car outright at the end of the lease period.
In a sense, therefore, both PCH and PCP are forms of long-term car rentals. But instead of paying by the day, you pay a monthly fee.
People who lease need to follow a strict set of rules. Because you don’t technically own the vehicle, the leasing company expects you to look after the car and maintain it to a high standard. After all, they want to sell it when the rental is over. If you fail to take care of the vehicle, you could be subject to penalties, as set out in the lease agreement.
How Do PCH And PCP Agreements Work?
When you take out a lease on a car, you need to do two things: sign a contract with various terms and conditions and permit the dealership to conduct a credit check.
The contract sets out how you’re allowed to use the vehicle. Many car lease companies will ask you to keep the number of miles that you put on the clock per year under a certain amount. The reason for this again comes back to the resale value: the higher the number on the odometer, the less the vehicle is worth. Generally speaking, the higher the annual mileage allowance, the higher the monthly payment amounts.
Contracts will also contain terms and conditions for how long you need to pay monthly instalments – usually two to five years. It is important to remember that you cannot end a lease midway through without incurring penalties.
The credit check is to ensure that you can make the monthly payments. While you can think of a lease as a rental agreement, it is also a kind of de facto loan. You get a brand new car upfront, and then you compensate the dealership through monthly payments in the years that follow. It makes sense, therefore, for the leasing company to undertake a compulsory credit check. They want to verify that you will make consistent payments.
What Restrictions Are There When You Lease A Car?
The restrictions placed on how you can use your car vary from one company to the next.
You May Need Written Permission Every Time You Take Your Car Abroad
Some finance companies may require you to apply every time you plan on taking your car to another country.
You Need To Return The Car In “Good Condition”
Leasing companies accept “wear and tear” – natural depreciation that occurs as an inevitable result of using the vehicle.
But they may charge penalties if there is damage that is not the result of general usage. For instance, if you modify the car in any way or spill drinks on the upholstery, they could charge you to fund the repairs.
You May Have To Pay Penalties If You Exceed The Agreed Mileage
Both PCP and PCH lease agreements come with yearly mileage limits. If you exceed this, you’ll need to pay more. You are able to decide the annual mileage allowance prior to starting your lease, as mentioned above, a higher allowance usually means higher monthly payments.
Typically, most finance companies charge around 10p per extra mile. While that might not sound like a lot, it can quickly add up. Most people, therefore, are better off taking out a lease with a more generous mileage cap. The average UK vehicle travels around 7,900 miles per year. Still, it is not uncommon to do 15,000 or more, especially if you use your car to commute to work.
This very website was designed to help those with lease vehicles to monitor their mileage allowance to best avoid any surprise charges when handing the vehicle back. Sign up FREE today and add your vehicle to start monitoring your usage with ease!
You Cannot Modify Your Vehicle
If you take out a PCH, you can never modify your vehicle. If you take out PCP, you can’t make changes to the specifications unless you pay the final ownership fee (often called a “balloon payment”). If you do alter it, you may have to pay a penalty.
The Legal Differences Between PCP And PCH
There are significant legal differences between PCP and PCH lease agreements.
When you take out a PCP agreement, you both rent the car and set up an opportunity to buy it in the future. With PCH, that option never becomes available.
The final PCP instalment is based on the Guaranteed Minimum Future Value of the vehicle. In other words, it is the remaining value of the car, after your initial payments and depreciation are taken into account.
The law, therefore, sees the lease payments that you make on a PCP contract as contributions to the final purchase price of the car. Consequently, it offers these leasers more protection.
The leasing company can repossess a PCH car without a court order at any time. But they cannot do the same for a PCP car once you’ve paid more than a third of the total payable amount. If they want to repossess your vehicle, they must apply for a court order.
Cancellation Rules For PCH Lease
Usually, you cannot cancel a PCH lease whenever you like. If you do, then the leasing company may ask you to pay the remaining value of the rental in full. You need to consider very carefully, therefore, whether it is worth cancelling the agreement. Some finance companies may offer to extend the lease, providing you with breathing space if you need extra time to make a payment.