What is Personal Contract Hire (PCH)?
In our guide on how to pay for your car, we touched on the various ways you can buy your car outright, lease it, or buy it on finance.
Here, we’re looking in more detail at one option when looking for a new car; Personal Contract Hire.
Initially, Personal Contract Hire was designed for businesses. It’s similarity to a rental car and the ability to change car regularly appealed to fleet operators, but in recent years private buyers are choosing Personal Contract Hire options for personal use.
Known as PCH, Personal Contract Hire seems complicated, but it is actually a straightforward means to drive a new car.
What is PCH?
In brief, PCH is essentially a rental agreement between the driver and the contract hire company.
The driver does not own the car, but pays a fixed monthly fee to drive the car. At the end of the agreement, the car is given back to the hire company and a new car can be chosen.
The deal usually lasts between three to four years and can include servicing and maintenance cover for the car in question.
PCH monthly payments
The calculations for monthly payments are fairly simple; the contract hire company will take into account the value of the vehicle as it is now.
It will then subtract the expected value of the vehicle at the end of the agreement, taking into account expected depreciation for the model in question. This figure, which represents the total depreciation over the period of the contract, is then divided between the number of months the contract covers.
This means drivers basically pay the depreciation of a car over a three-four year period but occasionally, road tax and servicing is included in the price as well. However, there may be other payments included.
It also means the longer the contract hire agreement, the lower the payments. However, this will mean a driver will have to longer before choosing a newer car.
Many PCH agreements come with mileage limits. For example, a car might be leased with an annual mileage allowance of 10,000 miles. If the car goes over that mileage, the driver will be charged a certain amount per mile over the limit.
However, this figure is usually between 1-10 pence.
Why choose Personal Contract Hire?
The single monthly payment option is often seen as an extremely useful way of lumping in payments into one.
In the case of Personal Contract Hire, road tax is often included in the payments, and for some, servicing and maintenance costs are part of the price.
The real benefits of Personal Contract Hire come about because the payments are based on the future expected value of the car.
This means a car with strong residual values will be much cheaper to hire than a car that loses a lot of value quickly.
If the car holds its value sufficiently well, PCH allows drivers lower monthly payments for cars they would maybe not be able to afford to buy outright.
Plus, because the driver does not actually own the car, payments will be lower than buying a car using finance or taking out a loan.
Finally, however, a major benefit of Personal Contract Hire is the fact a new car can be hired at the end of the contract, which is ideal for those who enjoy driving a modern, up to date car.
How to choose a car for Personal Contract Hire
There are several things to consider when choosing a car for Personal Contract Hire alongside all the usual considerations such as size, engine, specification, efficiency and even colour.
Chief among these is the residual value of the car. If a car costs £20,000 but is expected to cost just £4,000 in four years’ time, the driver will have to pay the £16,000 difference in PCH monthly payments over the four years. This works out at around £333 each month before other costs.
However, if a car costs £20,000 and is expected to cost £10,000 in four years’ time, the cost of depreciation per month will be slashed to around £208 per month.
This is just an example of how residuals affect monthly payments, but it showcases the importance of choosing a car with strong residuals.
Something to consider is the level of specification. If a host of extras such as leather seats are included, this could push the initial price up but not affect residual values, meaning the cost of the extras are absorbed in the monthly payments and make the car more expensive over the course of the agreement.
Finally, always remember to shop around for the best deal and only choose to take a personal contract hire agreement on if you are completely happy with it.