Monthly payments. That’s what everyone wants these days, and that’s often the chief deciding factor in why you might choose the Ford Thingamy over the Skoda Wotsit, although that Mazda Malarky does have a zero deposit deal…
Yet, even though finance is The Thing these days, it’s still all a bit shady and unclear as to how the two main finance options work. So here is Motor1’s guide to PCP and contract hire, but before we get started, a word of caution: No matter what we write here to clarify the two most popular ways of financing a car, the critical thing is to do the click-work in order to check out the best deals, and once you've got your shortlist, go and talk to an actual person in a dealership to find out what the cost will be to you specifically.
Before you do that, it’s best to find out what the blinking hell PCP and contract hire actually are, and what'll work best for you.
The critical thing here is that it offers you the option of buying the car at the end of the agreement.
PCP is a scheme that works on you choosing how many months you want the contract to last for, and then putting down a deposit that, of course, directly influences the monthly payments. At the end of the agreed term – normally between 24 and 48 months - you can hand the car back and start all over again (and many buyers do), or you can purchase the car outright by stumping up the final balloon payment that you will have seen and agreed to when you initially took the contract out.
So, if you do think you’re likely to buy the car eventually, be hawk-eyed about those ‘optional final payment’ and ‘total cost incl. interest’ figures.
PCP is the most popular way of buying a car at the moment, and dealers are incentivising it massively. They'll often offer a deposit contribution to throw into the pot with your own up-front payment, which is one area of the transaction where you can fall back on good old-fashioned haggling and try to persuade the dealer to up the amount they put in.
Another thing to watch carefully is the excess mileage charge. Any PCP contract works on an agreed annual mileage allowance and, if you go over it you will be charged per mile. This charge varies dramatically, from a couple of pence up to as much as 20p per mile or more. We’d advise being generous with your agreed mileage allowance, as upping it when you organise the contract parameters often makes a very minimal difference to your monthly payment, and it’ll mean you don’t have to worry about excess charges.
Contract hire and leasing are different names for the same thing. The critical difference between this and PCP is that you don’t have a stake in the car at all; the car remains in the name of the company or manufacturer you're leasing from. You are literally hiring it.
Otherwise it's very similar to PCP. You must still pay a deposit, normally either 3, 6 or 9-times your agreed monthly payments, so when you see a deal that advertises 6 + 36 months, that means you must pay 6 monthly payments initially as a non-refundable deposit to secure the car, and then a further 36 payments, meaning that it's a 37 month contract overall.
The upside is that if anything goes wrong with the car, the company that owns it is responsible for sorting it out, and they'll also cover your routine tax costs in your monthly payment. You'll just be responsible for sorting insurance and servicing, although a lot of contract hire deals can be set up with a 'maintenance' option, where you pay a few quid more per month and get the servicing all covered for that.
Mind you, just about every mainstream manufacturer offers fixed-price servicing with costs spread monthly as well, which in combination with a warranty on a new car will effectively still result in you having little or no responsibility if the car goes wrong in the first three years. So both PCP and contract hire offer that perk if you want to pay a bit extra each month for it.
Lease deals often come with high excess mileage charges as well, so – as with PCP - be sure you check what you’ll be paying if you do more mileage than you agreed, and be generous with the mileage allowance in the first place.
Put simply, if you have no intention of actually buying the car and just want monthly payments, contract hire could well be better for you than PCP.
Which one is best for me?
That comes down to your needs and wants. If you think you might want to buy the car eventually, then you have to go for PCP. If you’re not interested in owning the car and just want a new vehicle every few years with manageable monthly payments attached, and as little responsibility for maintenance on your part as possible, look very carefully at the deals offered on both types of finance; It’ll depend on the deals available on the cars you’re interested in as to what will be cheapest for you.
Here’s our latest pick of the PCP and contract hire deals to have a look at and get you started. Drop us a comment below if you want to ask a question.