Personal contract hire: How does leasing a car work?

Personal contract hire (PCH), also known as leasing, is one option for someone looking to get a new car. You make monthly payments to use the vehicle but have to give it back at the end of the term.

Rhiannon Philps Published on 24 May 2021.
Personal contract hire: How does leasing a car work?

If you’re considering getting a new car, then buying isn’t the only option. Leasing, also known as personal contract hire (PCH), is one way for you to drive a car for a set number of years without actually being the owner.

When you lease a car, you are effectively hiring it from the leasing company. This can come with certain advantages, but it may not be the right option for everyone.

Read on to find out how leasing a car works and what features it offers.

What is personal contract hire?

Personal contract hire, or leasing, is when you pay a leasing company a set amount per month to drive a car.

The leasing company owns the car, but you will be listed as the registered keeper while making the repayments.

However, while you have the option of owning a car with other types of car finance, when you lease a car through personal contract hire, you can never choose to buy it and become the legal owner.

At the end of the lease, you return the car and can then choose to take out a new lease if you want.

How does leasing a car work?

You can get a car lease from a dealership or online. Whichever option you choose, you will need to pass a credit check to make sure that you’re able to afford the monthly lease payments.

If approved for a lease, you will be able to pick up your car from the dealer or get it delivered to your home.

Before you can drive off in your car, the leasing company will ask for a larger initial payment, which could cost at least three times a standard monthly payment.

Most leases will run for two to five years. During this time, you will make fixed monthly payments to the leasing company and hand the car back at the end of the term.

Like PCP, the leasing company normally calculates the monthly payments based on the predicted depreciation of the vehicle. So, for example, if a car worth £18,000 was estimated to be worth £10,000 at the end of the lease period, then your monthly payments are likely to cover this difference roughly.

The leasing company will often then sell the car once it’s returned.

When you take out a lease, you will need to choose a mileage limit. This limit will affect how much you repay as the higher the agreed mileage, the more you are likely to drive the car, and the more it will depreciate. And the more value the car loses, the higher your payments are likely to be. Despite this, you should try to be realistic with your mileage as leasing companies will charge penalty fees if you go over the agreed amount.

Some leases will include other car-related costs, such as road tax and servicing. This can vary between leasing companies, so it is worth checking what exactly the price of your lease includes.

Car insurance often won’t be included in the cost of a lease, so you will need to arrange this cover yourself. Most leasing companies will require you to take out comprehensive car insurance on the leased car.

Leasing advantages and disadvantages

Advantages of leasing

  • You can change your car every few years.
  • It has fixed monthly payments.
  • It offers relatively low monthly payments compared to other finance options.
  • The overall cost will often be cheaper than PCP.
  • Your lease may include car tax, breakdown cover, servicing, or maintenance costs.
  • You don’t have to worry about the car’s depreciation as you’ll always return it at the end of the contract, no matter how much value it’s lost.
  • The upfront cost is smaller than buying a car outright.
  • The leased car may be covered by a manufacturer’s warranty.

Disadvantages of leasing

  • It comes with strict rules and restrictions, such as mileage limits.
  • You need to return the car in good condition as you will be charged for any damages.
  • You can’t modify or sell the car because you aren’t the owner.
  • The leasing company can repossess the car without a court order if you miss payments.
  • There’s no option to buy and own the car.
  • It can be difficult to end a lease early and you may face early repayment charges. In some cases, you may need to pay off the lease in full.
  • The monthly payments can be more than a PCP contract.
  • You may need to ask permission from the lease company and pay a small fee to take your vehicle abroad.
  • If the car gets written off, you will still need to pay to settle your lease. Your car insurance payout may not cover the full amount asked for by your leasing company, so you would need to make up the difference or take out GAP insurance, which could pay off the outstanding amount.

» MORE: What is GAP insurance?

Is leasing a car worth it?

If you like the idea of changing your car every few years and don’t mind not owning a car, then leasing could be something to consider. Paying monthly to use a vehicle can make driving a brand new car more affordable than it otherwise would have been, especially as leasing companies can sometimes offer competitive deals.

Leasing allows you to upgrade your car regularly. Also, because you’re not the owner, you don’t need to worry about losing your money in a depreciating asset, as you will simply give the car back at the end of the lease.

However, this also means that you have nothing to show for your money when you reach the end of your term, whereas if you choose to buy a car on finance, you would have a car after you’ve finished making your repayments.

If you would prefer to be the legal owner of a car and keep the same vehicle for many years, then leasing probably isn’t the best option for you.

Buying a car in cash and owning it for many years will typically be cheaper overall than leasing a car, but not everyone can afford to buy a car upfront. If you prefer to own a car long-term but can’t buy it outright, then car finance options like conditional sale and hire purchase could help you spread the cost.

» MORE: Find car finance deals

Source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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