In this guide, we break down the similarities and differences between car leasing (Personal Contract Hire) and PCP (Personal Contract Purchase) to help you decide which financing option suits your needs best.
Similarities Between Car Leasing And PCP
Leasing and PCP share many common features and are ideal for those who prefer to change cars every 2 to 4 years.
- Upfront Payment & Monthly Instalments: Both require an initial payment or deposit followed by fixed monthly payments.
- Mileage Limits: Each agreement comes with mileage restrictions, and exceeding these limits can result in additional fees.
- Travel Restrictions: Some companies may restrict overseas trips with the car. You might need to seek permission and/or pay extra for international travel.
- Returning the Car: If you don’t purchase the car at the end of the agreement, you’ll need to return it in good condition, whether it’s a lease or a PCP deal.
Differences Between Car Leasing And PCP
Before deciding between leasing or PCP, it’s important to understand how these two options differ:
Car Leasing Explained
Car leasing, also known as contract hire, comes in two forms: personal contract hire (PCH) for individuals or business contract hire (BCH) for businesses.
If you have bad credit, companies such as Compass Vehicle Services Ltd (CVS) specialise in leasing cars to people with poor or no credit, as cost effectively as possible and include road tax and a 12,000 annual mile allowance as standard in their lease deals.
How Does Car Leasing Work?
Leasing is essentially a long-term rental. The car will remain the property of the leasing company, and you make monthly payments over a set period, typically 2 to 4 years.
Structure Of Leasing Finance
Initial Payment: With a contract hire agreement you make an initial payment. The initial payment is made up of a number of multiples of the agreed monthly payments. For example, you may see a deal 3 x 35 or 3 + 35. The ‘3’ refers to the number of monthly payments you need to make as the initial payment in month 1 of the agreement.
Monthly Payments: Throughout the agreement you’ll make fixed monthly payments. Using the above example again 3 x 35, ‘35’ refers to the number of monthly payments after the initial payment so the length of this lease would be 36 months or 3 years.
Insurance And Maintenance
Insurance: You are responsible for arranging fully comprehensive insurance and ensuring your insurer knows you’re leasing the car.
Road Tax: This is typically included in your lease agreement.
Maintenance: Maintenance might be included, but many opt for a service plan for added peace of mind. Lease cars are often new and covered by a manufacturer’s warranty.
End Of Lease
At the end of the contract, you return the car to the leasing company. If you’ve adhered to the mileage and condition terms, no extra costs are due. Penalties may apply for excess wear or mileage. You can either extend the lease or begin a new one. Leasing isn’t suitable if you want to eventually own the car.
PCP Explained
PCP like leasing, can be referred to in numerous ways, such as: personal contract purchase, personal contract plan or even personal contract purchase plan. A PCP deal is essentially a loan to help you get a car. But unlike a normal personal loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal unless you choose to.
How Does PCP Work?
During the PCP agreement, you make monthly payments which only cover part of the car’s cost – the value that the vehicle is expected to lose during the term or depreciation.
This makes instalments more affordable, but also means that you don’t own the car automatically after you’ve made the final payment.
Structure Of PCP Finance
- Deposit: Typically, around 10% of the car’s price, with larger deposits reducing the amount you need to finance.
- Loan Amount: This is made up of the depreciation amount over the length of the deal usually 2 or 4 years, minus the deposit. This is the amount plus interest you’ll pay off each month throughout the agreement. So, you are not paying the full value of the car.
- Balloon Payment: If you want to keep the car at the end of the agreement, you’ll need to make a final payment, known as the balloon payment.
Insurance And Maintenance
Like leasing, insurance is the responsibility of the person or business named on the agreement.
Road Tax
Road tax is not included in the PCP agreement, so you’ll need to budget for it.
Maintenance
Most customers use service plans to cover maintenance costs for greater flexibility and to guard against additional costs.
End Of PCP Agreement
At the end of the PCP term, you have three options:
- Return the car: Hand the car back in good condition to avoid penalties.
- Buy the car: Pay the balloon payment to own the car outright.
- Trade it in: Trade the car in with a dealer, who can settle the finance on your behalf. If the car is worth more than the balloon payment, you can use the difference as a deposit for a new car.
Conclusion
Most people opt not to buy the car at the end of a PCP agreement. If this sounds like you, leasing could be a more cost-effective option.
Personal car leasing is an attractive choice for individuals seeking an economical and convenient way to drive a new car. Low upfront costs, regular access to new cars, reduced maintenance expenses, and freedom from depreciation worries, mean personal car leasing offers a flexible and cost-effective alternative to traditional car ownership.
For the latest car leasing deals head to www.cvsltd.co.uk and find your perfect car.