When it comes to car finance, you have a range of options to choose from. And there’s no right or wrong choice; each finance agreement has pros and cons to consider when trying to decide which is the right one for you.
Personal Contract Purchase (PCP) and leasing or Personal Contract Hire (PCH) are both types of car finance that give you access to a car in return for monthly repayments. They both also allow you to hand the car back and walk away once your agreement ends.
But which is the best option for you? We’re here to help you make up your mind.
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PCP spreads the cost of buying a new or used car, typically over a period of between two and four years. One of the biggest selling points of PCP is its flexibility - it gives you options at the end of your loan term.
When your PCP agreement ends you can:
Most PCP deals will ask you to put a deposit down upfront. Approximately 10% of the car’s purchase price is usually considered a good deposit.
You’ll then make fixed monthly payments throughout the loan term. These payments will be calculated so they cover the amount of value your car will lose in this time. That’s the difference between its current value and its estimated future value (its Guaranteed Minimum Future Value or GMFV). As you won’t be borrowing the full purchase price, repayments can be lower than other options like HP finance and personal loans.
If you’ve fallen in love with your car during the loan term and can’t imagine life without it, you can choose to buy it when your agreement ends. You’ll need to pay a one-off balloon payment though, which is usually equivalent to the GMFV.
Like any type of finance, there are advantages and disadvantages to PCP that may influence your decision:
Leasing – also known as Personal Contract Hire (PCH) – is a lot like a long-term car rental.
Your lease will usually last between one and four years and you’ll pay a fixed monthly payment throughout. Once the lease ends, you’ll simply hand the car back and walk away.
If you’ve found that your leased car is the perfect fit for your life, some lease companies will let you buy it at the end of your agreement, but this is never guaranteed.
You’ll probably need to put down a deposit upfront. The exact amount will depend on your agreement, but you might be asked to pay three, six, or even nine months’ worth of lease payments in advance.
Terms and conditions will also apply. Like PCP, most leases come with an annual mileage limit (and penalty charges if you go over it) and you’ll need to keep the car in good condition to avoid paying for the damage.
If you’re tempted by the thought of leasing a car, here are a few advantages and disadvantages to keep in mind:
Balloon payment is the term used to describe the one-off payment due at the end of some car finance loans. It’s a key feature of PCP finance and is usually equivalent to the GMFV – the amount the lender thinks your car will be worth at the end of your agreement. In a PCP deal, you’ll need to pay the balloon payment (either outright or by refinancing) to become the car’s legal owner.
When choosing between PCP and leasing, the best option for you will depend on your personal preferences, needs, and circumstances.
Here are a few of the potential deal breakers:
If you’ve always dreamed of being a car owner and enjoying the freedom that status represents, leasing might not be right for you. While some lease companies let you buy the car when your agreement ends, there are no guarantees. In most cases, you’ll need to hand the car back at the end of your lease term.
PCP gives you the option to buy the car and become its legal owner by paying the one-off balloon payment when your term ends. This means that, if you fall in love with your car and can’t bear to let it go, you can choose to pay (or refinance) the balloon payment and you won’t have to!
Both PCP and leasing can come with lower repayments than other types of finance like HP.
PCP is typically more expensive as leases aren’t designed to lead to car ownership and monthly payments are based purely on the value that the car will lose during your lease term. Keep in mind that leasing a car that depreciates quickly may cost you more each month than a car that is known to hold its value well over time.
PCP is based on the same thing, but due to the flexibility it provides, can be more expensive over the course of the loan term. There is also more interest to pay as this will be based on the car’s initial purchase price, not just its depreciation.
Leases usually have one ending: giving the car back. They’re an ideal choice for people who don’t want to worry about the commitment that can come with car ownership, who love having access to the latest models, and like changing their car up regularly. But if you do fall in love with your car, you might find yourself saying goodbye to it, no matter what.
PCP offers more flexibility. Like leasing, you can simply hand the car back at the end of the term if that’s the right choice for you. However, you can also buy it by paying the balloon payment to become its legal owner or use any available positive equity as a deposit in a new deal. Having the flexibility to change your mind two, three, or even four years after signing your agreement can be more tempting to those who aren’t sure what the future might hold for them and their new set of wheels.
There are some key differences between PCP and leasing when it comes to early termination, but one important similarity: a 14 day cooling-off period. By law all finance agreements - including PCP and leasing - give you the option to cancel your agreement within 14 days of signing. Once you’ve cancelled your contract, you may need to return the car or find an alternative form of finance.
With PCP, you have the right to voluntarily terminate your finance agreement under Section 99 of the Consumer Credit Act 1974. You just need to tell the lender you want to voluntarily terminate and return the car. It is important to note you will need to pay 50% of the total amount payable (including the balloon payment). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money. Extra charges might apply if the car is damaged beyond fair wear and tear.
Leases can be expensive to end early. You’ll be tied into a long-term contract and breaking that comes with fees that could be up to 50% of your remaining payments, as well as an early termination charge.
Both options will also charge you extra for any damage beyond fair wear and tear and for any miles that you’ve gone over your limit, so be sure to drive carefully and keep an eye on your mileage counter.
Disclaimer - Here at Carmoola we currently only offer Hire Purchase car finance agreements, subject to credit checks.