Personal Contract Hire is a way to rent a car for a long time then give it back.

Sounds perfect, but there are catches, so let's take a look at just what's involved and how to avoid the pitfalls.

How Personal Contract Hire (PCH) works

In a personal Contract Hire (PCH) agreement you lease a car for a fixed period (or 'term'), usually a number of months or years during which the vehicle is still owned by the leasing company (the 'lessor') but is rented to you (the 'lessee').

Effectively you are borrowing the vehicle from the lessor for a fixed period in return for a lease payment (or 'rental').

What Do You Pay For in Personal Contract Hire (PCH)?

During the lease period you pays a monthly rental which covers the costs incurred by the leasing company to operate the vehicle, plus a profit too.

In other words, you pay for:

• The depreciation in the value of the car over the life of the lease
• Vehicle Excise Duty - otherwise known as the 'tax disc'
• Interest on the money borrowed by the leasing company to buy the vehicle
• The leasing company's profit margin (which might be just the in the interest charges)
• VAT on the monthly rentals

At the end of the lease period you just return the vehicle to the leasing company which then typically sells the car and takes any profit or loss on the sale.

You only pay for depreciation during the lease period (the 'term'), so as each monthly rental is paid the payment reduces the outstanding amount financed by the leasing company at a much slower rate than in a traditional hire purchase agreement.

And because less of the purchase price is repaid each month, the total interest charged in a PCH lease is more than in a hire purchase deal.

However, repaying a lower amount of the purchase price each month means that the actual monthly payments are lower in personal contract hire than for a hire purchase agreement.

Advantages of Personal Contract Hire (PCH)

Because the leasing company recovers VAT on the purchase price of the vehicle the monthly rentals are lower than comparable finance instalments for Personal Contract Purchase (PCP), though VAT is then added to the monthly payment.

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, you simply operate the car rather than owning it, so personal contract hire is sometimes referred to as an 'operating lease'

Disadvantages of Personal Contract Hire (PCH)

If the lease agreement is terminated earlier than expected then you may be required to pay a an early termination 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.

Should You Lease with Personal Contract Hire (PCH) Or Buy?

This will depend on on your financial circumstances and whether or not you prefer the fixed costs of car leasing.

Basically, if you don't like the risk of car ownership (depreciation costs) then a lease will avoid any unforseen downturns in the used car market.

But the reverse is true too - if you take care of your cars and keep them maintained then you could make more money by buying your cars and eventually selling them for a better price than the market average.

You can see the cost of leasing a car on PCH compared to buying it through Personal Contract Purchase (PCP) using our lease comparison tool.