The Personal Contract Purchase (PCP) and Personal Contract Hire (PCH) are two ways of financing buying a new car. But while they have two out of three words the same, they are very different products with different end results.
What is a PCP?
A PCP car finance deal is a way of running a car that enables you to buy it at the end of the process. With a PCP, you pay a deposit then monthly payments which are calculated according to the size of the deposit, your mileage and how much the car will be worth at the end of the deal’s term.
When the loan period is over you have the choice between paying a lump sum (often called the Guaranteed Minimum Future Value [GMFV] or balloon payment) and owning the car, using any equity you have in the car to start a new deal with a new car, or walking away.
What is a PCH?
Personal Contract Hire is a private version of leasing a car. You pay a deposit and agree monthly repayments over a fixed term. At the end of the term, you simply hand the car back. You have no ability to own it.
Advantages of a PCP
If for whatever reason you decide you want to own the car you’re financing, you can with a PCP. Or not. It’s that flexible. You can own a brand-new car for less up-front payment than you might imagine. If the balloon payment or GMFV has been set well, you may end up with equity in the car at the end of the term. You can then put this towards a new PCP.
Many people pay the balloon payment to own the car, then sell it privately. This frequently gives them a greater amount towards a deposit in a replacement than rolling equity from the car over into a new deal.
Disadvantages of PCP car finance
You pay for that flexibility with slightly higher monthly payments compared with a PCH. Your payments are defined by the mileage you set. Set this too low (monthly payments will be lower) and you’ll have to pay a penalty at the end of the term.
Advantages of a PCH
With a PCH you are essentially hiring the car over a long period of time. Overall costs and monthly payments tend to be cheaper than PCPs. In some cases, you might be able to afford to lease a brand new car on a PCH for the same money you’d pay on a used one via a PCP. What’s more, all maintenance and servicing can be included in your monthly payments.
Disadvantages of a PCH
The car is and never will be yours. That might be problematic for some; it might be liberating for others. It’s very much a personal choice.
If you want to end a PCH early, there can be hefty get-out penalties, perhaps meaning you have to pay off the lease in full.
Penalties for going over the agreed mileage can be heavy, as with a PCP. Then once the hire period is over, you need to come up with a deposit to put towards a replacement contract.
Verdict
PCP is the more popular because of the flexibility it offers. But PCH is catching up because it’s cheaper. If you’re in a stable financial position to be able to afford the payments and you’re not expecting your circumstances to change, PCH could be the way forwards. Any doubts about those and you need a PCP.
I’ve been writing about cars and motoring for more than 25 years. My career started on a long-departed classic car weekly magazine called AutoClassic. I’ve since pitched up at Autosport, Auto Express, the News of the World, Sunday Times and most recently the Daily Telegraph. When I’m not writing about cars and motoring, I’m probably doing some kind of sport or working in my garden.
