Personal Contract Hire

Personal Contract Hire

Why is Personal Contract Hire so Popular?

Few purchases depreciate at the speed of a new car. As the theory goes, the car loses value as soon as you drive it off the dealer’s forecourt. However, there are ways to eliminate the negative effects of depreciation – and personal contract hire is top of the list.

PCH is both cost-effective and easy to manage. This guide to personal contract hire will explain how it works and who it’s right for.

Personal contract hire is essentially the same as regular contract hire, but it applies exclusively to private individuals. It is the most common form of car leasing and usually what the term ‘car leasing’ is referred to.

With a personal hire agreement you take control of a car for a contractual period ‘lease period’. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments for the duration of the contract.  When the lease expires you simply return the car and/or take a new one. As a result you never have to worry about resale values of the car – because you never own it, so you can simply return it and walk away.

It’s important to understand how your payments are determined.

The contract hire company will work out the ‘residual value’ of the vehicle – that is its value at the end of the contractual period. To estimate this value, the company will set a mileage limit while you drive the car – exceeding this limit could see you penalised at the end of the term.

To determine your payments, the company will deduct the estimated future value (residual value) from the retail price of the car – and you pay the difference in monthly instalments.

PCH Pros & Cons

There are many advantages to personal contract hire including:

  • Fixed prices – You can lease both new and used cars at a fixed monthly price – no APR. This can help you budget. Low initial payment – Typically three monthly payments although zero deposit leasing is an option.
  • Cost effective – The monthly instalments for a personal contract hire agreement will generally be lower than a personal loan.
  • Road fund licence – This will be included for the duration of the agreement. *Optional maintenance packages – Personal contract hire deals can include maintenance packages so you don’t have to worry about the general upkeep of the vehicle.
  • No depreciation concerns – You don’t have to sell the car at the end of the term so you don’t have to worry about its depreciation.
  • Access to more ‘upmarket’ vehicles – With a personal contract hire deal, you could afford a car that would otherwise be too expensive. As luxury cars tend to depreciate at the slowest rates, these often provide the best personal contract hire deals.

There are disadvantages to personal contract hire too, but generally these are based on perception:

  • Comprehensive car insurance – You’ll need a comprehensive car insurance deal as the car is not yours.
  • You never own the vehicle.
  • Fair wear and tear policy will apply, along with a mileage limit.
  • No option to buy – Unlike a personal contract purchase, there is no opportunity to buy the vehicle at the end of the contract.
  • Any change to the VAT rate will be reflected in the monthly price.

If you run a business, you should investigate business contract hire as this will may prove more tax efficient and so cheaper.

For individuals, PCH can be ideal dependent on your circumstances – just think about how you plan to use the vehicle.

If your annual mileage is high, the residual value of the car will drop which will increase your monthly payments. However, personal contract hire offers fixed monthly payments plus the option to drive a new car every few years. So as long as you don’t mind not owning the vehicle, PCH could be the right solution for you.

 

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