PCH is form of leasing to get the use of a vehicle without taking ownership
The leasing period (or 'term') is usually a number of months or years during which the vehicle
is still owned by the leasing company (the 'lessor') but is rented to the user (the 'lessee').
Effectively the lessee is borrowing the vehicle from the lessor for a fixed
period in return for a lease payment (or 'rental').
What's In PCH Rentals?
During the lease period the lessee pays a rental to the leasing company which covers
the costs incurred by the lessor to operate the vehicle, plus a profit for the lessor.
In other words,
the lessee pays for:
- The depreciation in the value of the car over the life of the lease
Vehicle Excise Duty
- Interest Charges on the money borrowed by the lessor to buy the vehicle on behalf of the lessee
- The lessor's profit margin (which might be just the interest charges)
- Maintenance (Optional)
At the end of the lease period the lessee normally returns the vehicle to the leasing
company. The leasing company disposes of the vehicle and takes any profit or loss
on the sale.
PCH is sometimes described as a 'partly amortised' or 'balloon' finance product.
'Amortisation' is the process of writing off the cost of an item over a period of time. With partly amortised or balloon leases such as contract hire only the expected depreciation in the value of the vehicle is repaid to the finance company over the finance period (the 'term'). In personal contract hire the expected residual value of the vehicle is left unpaid and at the end of the contract the lessee simply hands back the vehicle.
Because the lessee pays only for depreciation during the period of the lease (the 'term'), as each monthly instalment is paid the payment reduces the outstanding amount financed at a much slower rate than in 'fully amortised' leases.
Because less of the purchase price is repaid in each payment, assuming interest rates are the same in both fully amortised and balloon leases, the total interest charges in a
contract hire arrangement are more than those in a fully amortised finance product such as finance leasing or hire purchase
(because more money is left unpaid during the term), so the overall costs of finance for contract hire are higher than those of a fully amortised lease.
However, repaying a lower amount of the purchase price each month means that the actual monthly payments are lower in contract hire than for a fully amortised lease.
Advantages of Personal Contract Hire
Because the leasing company recovers VAT on the price of the vehicle the rentals for
passenger cars will be lower than comparable finance instalments for Personal Contract Purchase (PCP).
Because the vehicle is leased, the normal responsibilities of ownership, such as sourcing
the best deal and obtaining the best resale (or 'residual') value, are avoided, as
is the risk of the residual value being less than expected.
In effect, the lessee simple operates the vehicle rather than owning it, so contract hire is sometimes referred to as an 'operating lease'
Disadvantages of Personal Contract Hire
If the lease agreement is terminated earlier than expected then the lessee may be
required to pay a penalty (usually a number of months rentals).
In addition, if the vehicle is returned with more mileage than that agreed for the term of the lease, or is not in a condition appropriate for it's age and the lease mileage, then 'end of contract' charges may be made by the leasing company.