Updated on June 19th, 2019
Personal contract hire is one of the main forms of car leasing. It is also a great alternative to other car finance options if you’re not ready to purchase a car. If you think this financing option is right for you, it is important that you do some research before taking the plunge. To help you out, we’ve put together a guide outlining the benefits and everything you need to know about personal contract hire.
Personal Contract Hire Explained
Personal Contract Hire, also known as Personal Leasing and abbreviated to PCH, is a type of car financing that applies to individuals rather than businesses. It involves renting a new car over a given period of time (common contracts are for 12, 18, 24, 36 and 48 months). At the end of the lease term, the finance company collects the vehicle and you get to pick a new one again.
Most plans require an initial one-off payment followed by fixed monthly payments which are based on the value of the vehicle, the duration of the contract, interest, taxes and the residual value.
The Benefits Of Personal Contract Hire
The advantages of hiring go beyond the perks of driving a brand-new car regularly. In addition to flexible monthly payments and maintenance packages, leasing avoids tying up your money into something that’s depreciating. It also allows you to take control of your monthly vehicle spend. Apart from insurance and gas, you’ll know what motoring expenses you’ll incur as the costs are rolled into one – monthly payments, breakdown cover, and Road Fund License.
What Is Residual Value?
Residual value is an important determining factor in the cost of the vehicle lease. It is the estimated value of the car after a certain period of time. For example, if you lease a new $30,000 car that’s expected to depreciate by 25% during the one-year lease, the vehicle’s residual value after one year would be $25,500.
So should you hire a car with a high or low residual value? If you want to lease a vehicle for a certain period of time, looking for a high residual value car is a smart idea. The more a car retains its residual value, the lower your monthly payments will be. However, if you go the Personal Contract Purchase (PCP) route – purchasing a car at the end of the contract hire term, then going for a vehicle with a low residual value is a good idea. While the monthly payments will be high, the purchase cost at the end of the contract will be lower.
What Do You Need To Know About Personal Contract Hire?
As attractive as leasing may sound, it has a number of drawbacks. First, you must have a stable source of income to qualify for PCH. Second, you never own the vehicle and you don’t have the option to purchase it at the end of the lease. Third, you can only drive a set number of miles throughout the contract term. Fourth, you must maintain the car in good condition or you’ll have to pay extra wear-and-tear charges when the lease term is over.
What Happens At The End?
When the lease expires, you’ll have to return the car to the finance company. However, the company may contact you around six months before the contract is over to discuss what you’d like to do. You’ll have two options; look for a brand-new car or extend the contract term for your current lease.