Car leasing contracts explained

Want a new car for the lowest monthly payment? Car leasing could be for you. Keep reading to understand how lease contracts differ from PCP

John Evans
Apr 29, 2020

Leasing, Personal Contract Hire, personal lease… Car leasing has many names and several forms - with some designed for company car users, but here we’re interested in what's known as Personal Contract Hire (PCH), which is available to ordinary drivers.

This developed from contract hire, a form of leasing used by businesses that, rather than tying lots of cash up in buying cars prefered to essentially rent them instead. The benefit for those looking to fund their own car, however, is the same - low monthly payments.

Personal Contract Hire options have become more common following the huge popularity of Personal Contract Purchase (PCP) finance over the last few years. Both options can provide low monthly payments, but there are a number of differences between them, so keep reading to understand which options best suit you.

PCH is not as popular or well known as PCP yet, but an increasing number of drivers are now choosing PCH to get the car they want for the lowest possible monthly payment. So, if you want to get the best car for your monthly budget and aren't concerned about owning the car at the end of the contract, leasing is well worth considering. For more details, read on.

What is Personal Contract Hire (PCH)?

The clue’s in the name, really. Personal means it’s for ordinary motorists - unlike standard contract hire, sometimes referred to as Business Contract Hire. Contract means you sign up for a set term, at the same time agreeing to a mileage limit and to keep the car in good condition (exceed the mileage limit and/or return the car with any damage beyond fair wear and tear and you can expect to be charged extra). And hire means exactly that: you pay an initial rental upfront plus monthly rentals and then you hand the car back - as you're hiring the car, there's no option to buy it.

This last feature is what makes PCH different from PCP where you have the option to buy the vehicle at the end of the contract. There are other differences, too, which we’ll explain later. Essentially, PCH suits drivers who want to effectively rent a car for a period of time. Costs are split into an initial payment - the larger this is, the lower your monthly payments - followed by a series of monthly rentals. Once you get to the end of the contract, you simply hand the car back and can start again.

How are PCH monthly payments calculated?

Just like with PCP finance, the monthly payment you have to make with PCH is affected by the length of the contract (typically 12 to 48 months for a lease), the mileage allowance and the initial payment you put down up front (it’s a multiple of the monthly rentals, with three, six or nine months being common). Typically, the longer the contract is, the lower your monthly payments will be, while higher mileage allowances increase the monthly payments needed and larger initial payments decrease them.

For these reasons you may see a Personal Contract Hire deal expressed as a 6-36-10 or a 3-24-8 deal. It’s a throwback to the business world where they like speaking in riddles. However, although it looks like code in the case of the first example, it simply means a deal constructed of six rentals up front (the deposit), followed by 36 monthly rentals, with this contract requiring you to stick to a limit of 10,000 miles per year.

The most important factor in affecting leasing costs, however, is how much value the car is expected to lose over the length of the contract - known as depreciation. The more value a car loses while you're running it, the higher your monthly payments (this is equally true for PCP finance). It’s why some otherwise expensive but sought-after models can cost the same per month as cheaper, less desirable cars that lose a greater proportion of their value over the same period.

Who is PCH for?

Leasing is for anyone who doesn’t feel the need to own their car but who wants the most affordable monthly payments. You might regard a car as being like a mobile phone that you simply replace with the latest model at the end of the contract. Meanwhile, you might want to have a series of new cars, so you don't have to worry about spending more maintaining an older car. Whatever your reasons, with PCH you give the car back at the end of the contract, end of story. It many cases, it may also work out cheaper than the equivalent PCP deal, so you could pay less to run the car for the length of the contract and then hand it back with leasing.

If you do want the option to buy the car at the end of the contract, though, PCP could suit you better, as you have the option to take ownership when the contract ends by making the pre-agreed optional final payment. Bear in mind, however, that four out of five people who take out a PCP go on to hand the car back anyway so the ability to buy the car may not turn out to be necessary. If that's the case for you, it's worth getting like-for-like leasing and PCP quotes to see which option gives you the lowest monthly payment. 

Can I never own the car with a PCH?

Theoretically no - PCH is set up so that you hand the car back when the contract ends - but if you do fall in love with the car, you can always ask the leasing company if they’d consider selling it to you and negotiating a price. Be prepared for the company to say no or to tell you they’ve already got a buyer waiting for it, though.

The fact is, leasing companies can’t afford to delay disposing of their lease cars. Instead, they have buyers ready and waiting to buy them at pre-agreed prices the moment they are handed back, or they could be booked in to be sold at an auction. This is why leasing companies are so strict about you returning the car in good condition and with no more than the agreed mileage, as damage and higher-than-agreed mileages can both reduce the value of the car.

Can I get out of a PCH deal if my situation changes?

Here’s another area where PCH differs from PCP. With PCP finance, as long as you have the paid half the total amount payable – that is the amount you’ve borrowed, including the optional final payment, all the interest and fees - you have the right to hand the car back with nothing more to pay. This is known as Voluntary Termination.

Depending on when you choose to do this you’ll either have little left to pay or a substantial amount, but whatever stage you're at you can always pay the remaining amount needed to top up the amount to the 50% figure. This may be a useful option if your situation changes and you can suddenly no longer afford the car or the car is no longer suitable for your needs. Furthermore, despite what you may be told, using Voluntary Termination shouldn't affect your credit rating.

With a PCH deal, though, you don’t have the same termination rights. Instead, you’ll have to negotiate with the leasing company to be able to end the contract early. The company may agree to this, but potentially with strings attached in the form of fees and other costs - potentially including a certain proportion of the remaining monthly payments. The worse case scenarios is that you may be asked to pay all the remaining leasing rentals, even if you hand the car back. As a result, it's worth being confident that you can afford the car for the length of the contract, or have some contingencies in place, if you go for PCH leasing.

What should I consider when comparing PCH and PCP?

  • If you think your financial situation might change during the contract, it's worth making sure you can afford the PCH monthly payments whatever happens, as terminating the contract could prove more complicated - and potentially more expensive - than with PCP.
  • As you have to hand the car back at the end of a lease, make sure you're aware of the mileage allowance you sign up to and keep the car in good condition. Unlike with a PCP, where you can always buy the car at the end of the contract for a pre-agreed amount to avoid any excess mileage or damage charges, with a PCH deal you will have to pay any charges imposed.
  • Be sure that you don't want to own the car at the end of the term before you enter into a PCH contract, as this is unlikely to be possible.
  • You’ll need to take out comprehensive insurance if you are financing or leasing the car, and so are not the legal owner. Check whether your policy pays out the new replacement value of the car should it be written off. Some do in the first year. If the policy doesn’t, consider taking out Gap insurance, so you don't face a shortfall, should the worst happen. This bridges the gap between what the insurer pays out (typically, the car’s current market value) and the amount that you owe the leasing company (unless you're at the very end of the contract, the vehicle is usually worth less than the remaining balance).

PCH extras

If the idea of a single monthly rental covering everything but fuel and insurance costs appeals, it’s possible to add things such as maintenance (including fresh tyres) to the monthly rentals on a PCH deal. Lease deals typically include the cost of road tax, too.

Several car manufacturers offer schemes such as Just Add Fuel, which also include the cost of car insurance, so the whole cost of running a car is bundled into one monthly payment, and all you have to do is think about topping it up with fuel from time to time. 

Comparing PCH deals

Car finance deals can be complex. Similarly, leasing quotes can prove a little confusing. The main figures to bear in mind are the initial rental amount, the monthly payment figure, the length of the contract and mileage allowance. The most important thing to remember is that varying the upfront payment, contract length and mileage allowance all affect the monthly payments. Therefore, when getting quotes, make sure that they are like-for-like, so you can see clearly which one offers you the best value. 

This means that you can only gauge the best deal when looking at offers with the same deposit, the same contract term and the same mileage limit. A car that costs £200 per month may look cheaper than one costing £300 but if you have to pay £5,000 more upfront, it could prove far more expensive. You'll only know for sure if you get like-for-like quotes. Finally, make sure that any quote you look at includes the cost of VAT, as Business Contract Hire - which is only available to companies - doesn't. Expect to have to pay an extra 20% on top of any Business Contract Hire figures quoted.

Understanding a PCH quotation

BuyaCar works with, which offers PCH leasing. The way it sets out its quotations is straightforward and similar to other providers. A comprehensive quotation should look like this:

  • The headline monthly pament figure that should confirm that it includes VAT.
  • Initial rental (or Advance) showing the upfront payment required - either as a cash figure or as a multilple of the monthly payments
  • Additional fees showing any other costs
  • Total lease cost so you can see the overall cost of the lease to make a quick comparison with other deals
  • Contract length expressed in months
  • Annual mileage showing how many miles you can cover each year without additional charges
  • Excess mileage charges showing a per-mile charge for mileage above the contracted figure
  • Road tax – whether it is included or not
  • Maintenance – whether it is included or not

In addition, quotes should provide a detailed description of the car including make, model and trim. Only when you have all this information can you confidently compare PCH deals.


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