CARTAXPRO: PCP or PCH

Which personal car finance is better for you?

PCP or PCH?

7 September 2020

Confused by new car finance?

We explain the two main new car finance products.

Car dealers use two confusing sets of initials when talking about new car finance - 'PCH' and 'PCP'.

It's easy to mix up the two, but they are very different products and suit different types of car users.

One way gets you your own car if you complete the deal, the other only rents a car to you.

But which is which?

Let’s separate PCP and PCH and explain exactly what you get ...

Our Busy Buyer's Guide To PCP and PCH

What Exactly Is It?	PCH: Personal Contract Hire A lease on a car	PCP: Personal Contract Purchase A type of hire purchase
What’s the deposit?	Typically a multiple of the monthly payments	Can be a cash value (e.g. £5,000) or a multiple of the monthly payments
What’s in the monthly payments?	A VAT inclusive amount to cover depreciation, interest charges and the tax disc	No VAT, just covers depreciation and interest
Who pays for tax disc renewals?	Included in the monthly payments	You pay separately at renewal time each year
Do I get a discount?	Any price discounts are already included; the leasing company will have negotiated a discount for you	You haggle, but you may also get an extra discount as a finance company deposit contribution
Who pays for depreciation?	The leasing company forecasts the depreciation and this is fixed for the life of the lease (as long as you take care of the car), so you still pay for depreciation but your liability and the cost to you is fixed	The finance company forecasts a final payment based on what the car might be worth at the end of the contract, but this payment has to be less than the car will really be worth, so you pay more in depreciation than through PCH
Who takes the risk on depreciation?	The leasing company takes the risk on second hand values – it profits or loses according to whether it got the forecast depreciation right or wrong	The dealer/finance company takes the risk. If the final payment is set too low you can sell the car or trade it in and profit from the surplus. If the final payment is set too high then you can just hand back the car to cover it and walk away
Ownership?	No	Yes, if you want it
Advantages	Initial payment can be tailored to suit your budget, bigger initial payments mean lower monthly payments, but won’t necessarily affect the total you pay. You can choose your own mileage limits (within certain bands) and the length of the contract to suit your personal needs. Normal responsibilities of ownership, such as sourcing the best deal and obtaining the best resale value, are avoided, as is the risk of the residual value being less than expected. Usually cheaper than PCP because the leasing company can recover VAT on the price of the vehicle, even though it must charge VAT on the monthly payments	Deposit amount is up to you, subject to the lender’s minimum, and bigger deposits should lower the total finance costs If you exceed the mileage limits you can either pay an excess fee or keep the car (assuming you have funds to buy) If the end value of the car is more than the forecast residual value you can sell the car for the actual value and either keep the difference or use it as a deposit towards a new car The car's expected future value at the end of the finance agreement is fixed in the agreement so you know how much depreciation will be and how much you will get for your car when you have finished the finance repayments
Disadvantages	Early termination of the agreement may incur a penalty 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 its age and the lease mileage, then 'end of contract' charges may be made by the leasing company for repairing excessive wear and tear or to compensate for higher mileage You can’t profit from selling the car for a higher price (for example if you’ve looked after the car and it’s in good condition for its age and mileage)	Exceeding the agreed contract mileage will normally incur an excess mileage charge Not taking care of the car can incur hefty charges for putting right bumps and scrapes You will normally have to make your own arrangements to pay for the annual tax disc renewal (unless you have also arranged a maintenance contract which includes this service)
Summing Up:	If you're happy with never owning a car and don't want the risk of changes to second-hand values then PCH has a clear advantage But remember that the leasing company will take all the profit when second hand values are high	If you want the 'feel' of owning your car then PCP can give you this option at the end of the contract And if you want to run the car for more than the finance contract term, you get the option to buy it at the end of the contract
Want To Know More?	Our detailed guide to PCH »	Our detailed guide to PCP »

Watch Very Closely ...

If our table still hasn't quite got you to a decision on the right type of finance for your next new car then don't worry.

PCP and PCH costs can vary considerably from car to car and a seasonal deal from one manufacturer or another can often tip the balance either way between a PCP or PCH deal until the offer expires.

If all that matters to you is which set of numbers, PCP or PCH, works out cheaper then our 'Lease or Buy' calculator is just the tool you need to make a decision.

You can compare the costs of leasing vs buying instantly and see the difference one deal or another makes to your pocket.

So if you're deciding right now how to finance your next new car, try our 'Lease or Buy' calculator - it could be just what you need to make the right decision.