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.
Personal contract hire 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 when the term ‘car leasing’ is referred to, most people are talking about personal contract hire.
With a personal contract hire agreement you take control of a car for a contractual period – usually referred to as the ‘lease period’. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments to a leasing company for the duration of the contract – and when the contract expires you simply return the car to the leasing company or take out a new personal contract hire lease. 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 personal contract hire company will work out the ‘residual value’ of the vehicle – that is its value at the end of the contractual period once depreciation is taken into account. To estimate this value, the company will ask you to stick to a strict 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.
There are many advantages to personal contract hire including:
- Fixed prices – You can lease both new and used cars at a fixed monthly price and not have to worry about interest charges. This can help you budget. Low initial payment – Typically three monthly payments.
- Cost effective – The monthly instalments for a personal contract hire agreement will generally be lower than those of 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 will not be able to take out third party car insurance, you’ll need a comprehensive 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 agreement, 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 regular contract hire as this will include VAT built into monthly payments and additional incentives such as hire rental tax allowances.
However, for individuals, personal contract hire can be ideal dependent on your circumstances – just think about how you plan to use the vehicle.
If you travel a lot and your mileage is high, the residual value of the car will drop which will increase your monthly payments. However, personal contract hire gives you fixed monthly payments and you have the option to drive a new car every few years, which is an excellent incentive. So as long as you don’t mind not taking ownership of a vehicle, personal contract hire could be the right solution for you.