Car Leasing vs PCP

Published 1 May 2019

In this guide we explain the similarities and differences between car leasing and PCP so you can choose the right car financing option for you.

Similarities Between Car Leasing and PCP

Leasing  and PCP have a number of similarities, and suit those who like to change their car every 2 to 3 years.

• Both normally require an initial payment or deposit followed by a series of fixed monthly payments.
• Each usually have strict mileage limits and penalties if these are exceeded.
• Some companies impose restrictions on taking the car abroad. If you do want to take an overseas trip you may need permission and/or pay an extra charge.
• Whether you lease your car or have a PCP agreement and you choose not to purchase the car –  you will need to hand back the car in good condition.

Differences Between Car Leasing and PCP

If you are considering PCP or leasing to finance your new car it’s important to understand how these two differ before you make your choice:

Car Leasing Explained

The confusion over car leasing is often down to the various terms used to describe it.  Car leasing is formally known as contract hire. Contract hire can be referred to as personal contract hire (PCH) or business contract hire (BCH) depending on whether you are an individual or business leasing the vehicle.

How does contract hire work?

• Car leasing is basically just a  lengthier version of car hire or car rental. The car is hired but remains in the ownership of the leasing company.
• Typically a car is leased between 2 and 4 years.
• A person or business pays regular monthly payments over an agreed number of years.
• Each lease deal will contain an agreed mileage limit

What is the structure of the leasing finance agreement?

Initial Payment

With 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.

Who Pays for Insurance When Leasing a Car?

It is the responsibility of the person named on the finance agreement to arrange and pay for fully comprehensive insurance for the vehicle.  It’s important to make the insurer aware that you are insuring a lease car and are not the registered keeper.

Who Pays for Road Tax When Leasing a Car?

Road Tax is included in the cost of your lease and will be arranged by the Leasing Company.

Who Pays for Maintenance of a Lease Car?

Maintenance is sometimes included, but most customers favour a service plan to budget for it.   Lease cars are usually brand new and so will still be covered by the manufacturer’s warranty.

What happens at the end of the lease agreement?

• At the end of the contract, you simply hand the car back to the finance company.
• As long as you have kept to the terms and conditions of the lease there will be no costs to pay.
• Penalties will be payable for a car returned with excessive damage, or one that has exceeded the agreed mileage limit.
• You can ask about the possibility of keeping it thereby extending your contract, or start afresh on another brand new car on a new contract.

If you want to own a car, then PCH isn’t the right option for you.

PCP Explained

PCP like leasing, can be referred to in a number of different ways; personal contract purchase, personal contract plan or even personal contract purchase plan. A PCP deal is basically 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 Personal Contract Purchase Work?

• During the course of the 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.

What is the Structure of a PCP Finance Agreement?

There are three main parts of a personal contract purchase:

• The deposit which is generally about 10% of the car’s price. The larger the deposit the less you have to borrow.
• The loan amount. This is made up of the depreciation amount over the length of the deal usually 2 or 3 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.
• The balloon payment is the balance to pay at the end of the agreement if you want to purchase and keep the car. This is optional.

Who Pays for Insurance with PCP?

Just like contract hire, insurance is the responsibility of the person or business named on the agreement.

Who Pays for Road Tax with PCP?

Road Tax is not included with a PCP agreement so do remember to budget for it.

Who Pays for Maintenance with PCP?

Most customers these days choose to use a service plan to budget for that. It gives you more flexibility when it comes to maintaining your car.

What Happens at the End of a PCP Agreement?

You have three options:

1. Hand the car back to the finance company in good condition to avoid paying penalties.
2. Settle the agreement, by paying the remainder of the finance known as the balloon payment  and keep the car
3. Trade the car in with any car retailer. If your car is worth more than the balloon payment, you can hand the car to a retailer who will settle the finance for you. The remaining balance can be returned to you or used as a deposit towards another car.

The majority of people do not buy the car at the end of the PCP agreement. If you think you are in the majority then leasing may be a better more affordable option.

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