The press has got it wrong: PCP and PCH are good products

I’m getting a touch tetchy over confusing articles appearing in the press about PCP (Personal Contract Purchase) and PCH (Personal Contract Hire) car acquisition methods.

Writers in the mainstream press are not only confusing terminology but suggesting PCP is a BAD THING.

So I’ve had enough of this sort of nonsense, and thought I’d explain why both of these are good products, there’s little risk to the consumer and why they shouldn’t be confused.

Let’s start with a Personal Contract Purchase (PCP)

This is a really useful product that gives buyers a variety of choices before they end up buying a car – or not. Because it has a lot of flexibility.

A PCP is a purchase agreement, with a deposit at the front end and a guaranteed future value on the car (which can be two, three or four years away).

The consumer then pays monthly amounts that cover the depreciation of the car (retail price minus deposit) and any finance costs to its guaranteed future value – in other words there is no requirement to pay the full price of the car from the start, unlike HP. The result is significantly lower monthly payments.

Once the consumer has paid all the agreed amounts, they then have a choice – and this is where I really like its flexibility:

  1. pay the final ‘balloon’ amount (the remaining cost of the car) to purchase it outright; or
  2. use any excess value in the car as a deposit for a new agreement; or
  3. simply walk away if the guaranteed future value is below the stated amount (if, for example, used car values have dropped more than predicted).

But there is no risk for the consumer – since the value of the car (the asset) is being underwritten by the finance company.

For example, if used values do come under pressure and the final guaranteed value is worth more than the car, then it’s the finance company that takes the hit. The consumer can return the car and buy a cheaper second hand car; or start the PCP process again.

PCP is not a lease – although the mainstream press has been using the term indiscriminately – and the monthly payments are not lease payments.

There are some downsides to PCP. Consumers can find the different choices at the end of the agreement challenging; the car does need to be kept in good condition; and the mileage must be as stated on the agreement – drive too many miles over the agreed amount and it will affect that predicted guaranteed future value.

So far so good. Hopefully.

Now let’s turn our attention to Personal Contract Hire (PCH)

PCH is a type of long-term rental that will suit you if you’re not looking to buy the car but just enjoy the use of it (subject to certain terms and conditions).

For a Personal Contract Hire (PCH) agreement, you lease the car for an agreed period of time and mileage by making fixed monthly payments that are outlined before any paperwork is signed. At the commencement of the lease, you are asked to pay three or six months’ rentals in advance (usually a lower amount than is required with a PCP).

At the end of the contract, you simply return your car and take out a new contract on a new vehicle, should you wish. There is, for example, no balloon payment.

There are some downsides, as you would expect. You cannot alter the agreement, so if you suddenly change jobs and start covering double the mileage then you will be liable for excess mileage payments. You are also expected to keep the car in good condition, otherwise you will be charged to repair items such as damaged alloy wheels and scratches, for example, on the bumper.

Is an HP (Hire Purchase) agreement better?

Not, in my opinion.

HP monthly payments will be higher than PCP or PCH, as you’re paying off the full value of the car from day one. Plus, you cannot sell the car without settling the finance – as title to the car does not pass to you until the final payment has been made. So you do end up owning the vehicle, but there’s no flexibility in the agreement should your circumstances change during the HP agreement period.

One final point.

PCP and PCH allows consumers to access newer vehicles on a more regular basis with all the upsides that entails (safer cars, lower emission cars, and all the latest technological advancements) with fewer unexpected maintenance bills and an environmental upside of getting greener cars on the road.