PCH (Personal Contract Hire) in brief

• Effectively long-term car rental over a set period of time and mileage
• Also known as personal leasing
• The car is returned to the leasing company at the end of the agreement with nothing more to pay (subject to certain conditions)
• Good for non-VAT registered sole traders and small companies

KNOW the car you want, but want the most cost-effective way of financing it? Confused over which is the best form of car financing for you?

Firstly, you need to think what’s affordable for you; then there’s the worry of the potential losses, because of the volatility in the residual value of cars.

So what sort of car finance should you take?

Well, car finance has been back in the news recently. Why? Well fears of negative equity in car deals, plus the prospect of a Financial Conduct Authority (FCA) investigation into motor finance has brought things to a head.

The resulting commentary in the media has sometimes exposed confusion over what the difference to consumers are between Personal Contract Purchase (PCP) and Personal Contract Hire (PCH), as well as confusing the terminology to describe each product.

So to solve that confusion here’s the definitive definition of PCH.

• PCH or Personal Contract Hire is effectively a long-term car rental.
• It is also known as personal leasing,
• With a PCH agreement the consumer agrees to rent a vehicle for a set period based on a pre-agreed annual mileage. There is an initial rental (usually three or six times the rental), followed by monthly rental payments spread over the length of the agreement (two, three or four years).

Monthly rentals are commonly referred to as lease rentals, rentals or monthly lease payments.

At the end of the personal contract hire agreement, the car is returned to the leasing company with nothing more to pay (subject to certain conditions on the appearance of the car and any excess mileage incurred). And that is the end of the personal contract hire agreement, although of course you can take out another, should you wish.

The PCH plus points

PCH agreement allows consumers access to new cars on a regular basis at fleet negotiated discounts. Consumers are protected from any loss in value incurred by falling used car prices as this risk is borne by the leasing company.

Personal contract hire agreements are a regulated finance product overseen by the Financial Conduct Authority.

A PCH is a simple to understand product that is becoming increasingly popular. A maintenance agreement can also be added to cover expenditure on areas such as servicing and new tyres. This can be paid monthly as part of the rental.

If you use a PCH car for business, then you can charge 45p per mile tax free over the first 10,000 miles. For more information on this click here.

The PCH downsides

There are some potential drawbacks to PCH agreements. In most cases, you cannot alter the agreement, so if your circumstances suddenly change and you’re covering double the mileage agreed, then you will be liable for excess mileage payments.

There are fair wear and tear charges applicable if the car is not returned in the condition stated in the paperwork – damaged alloy wheels, for example, will be charged for, although such details can be discussed with your leasing broker or leasing provider prior to the car’s return so estimates can be prepared. These fair wear and tear charges are regulated by the BVRLA.

If you decide to terminate the agreement early there can be expensive early termination charges to be met.

Otherwise, PCH is a straightforward and low cost method to access the newest, cleanest and safest cars on the market. Just make sure it’s what you want, because once you’re in a PCH agreement, you’re pretty much locked in.

PCH is just one method of car finance

There are other products such as PCP (Personal Contract Purchase) and traditional HP, a car loan or a personal bank loan, along with cash that are available, while businesses can also use Business Contract Hire and Finance Lease among others.

Find the right personal contract hire supplier for you

Leasing brokers are available to provide impartial advice to ensure financial suitability under strict FCA guidelines, including product affordability. You can view a directory of Leasing Broker Federation members here.

Want to know more about car leasing?

• Read our Car leasing made simple guide