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PCH and PCP: the facts
I’m getting a touch tetchy over confusing articles appearing in the press about PCH (Personal Contract Hire) and PCP (Personal Contract Purchase) car acquisition methods.
They are two very different types of car acquisition. PCH is a long-term rental; PCP is a form of purchase hire. They might use similar acronyms but that’s about as far as it goes.
Writers continually mix up the terminology, talking about a low deposit on a PCH, which if I had one of those green eye shades, with my baggy white shirt sleeves held up by silver bracelet retainers, and a sharpened red pencil of those copy editors of old, I’d be scribbling through such copy.
You cannot have a deposit on a PCH agreement. You can have an initial rental. On a PCP you pay a deposit. See what I mean?
But writers in the mainstream press are not only using incorrect terminology but also suggesting that a PCP can be 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 Personal Contract Hire (PCH)
A PCH is a type of long-term rental that will suit you if you’re not looking to buy a car but just wish to enjoy the use of it (subject to certain terms and conditions). They are predominantly available from fleet management companies such as ourselves or specialists in PCH such as our sister brand Intelligent Car Leasing.
With a 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 one, three or six months of rentals in advance (which usually represent a much lower amount than would be required with a PCP deposit).
At the end of the contract, you simply return your car and take out a new PCH agreement 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 certain dents and scratches.
Let’s move on to 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. It’s the primary method of funding at car dealers.
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 there is with HP. The result of this means monthly payments are significantly lower.
Once the consumer has paid all the agreed amounts, they then have a choice – and this is where I really like its flexibility:
- pay the final ‘balloon’ amount (the remaining cost of the car) to purchase it outright; or
- use any excess value in the car as a deposit for a new agreement; or
- 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 written at more than the car’s actual worth, 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 as they are with PCH.
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. If you do decide to walk away from the car, you lose your deposit and the payments you have made towards it.
So far so good. Hopefully.
Is an HP (Hire Purchase) agreement better?
No. Not in my opinion.
HP monthly payments will be higher than PCH rentals or PCP payments, 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.
PCH and PCP 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 faster.
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