PCH or PCP? Getting the Best Deal Is All About Understanding Your Options

General Guides 

To buy, or not to buy, that is the question. Actually that isn't the question but it was too good an opportunity to resist.

The question is really, when it comes to financing your next car what is the best option for you?

It used to be the case that if you needed a new car you saved up for ever or you took a stroll into town and had a slightly uncomfortable and nervous chat with the Bank Manager. If you were really fortunate a dealer might offer you an expensive finance agreement designed to ensure you lived entirely on baked beans until your car was paid off.

Now it's all about PCP, PCH, and various other acronyms dreamed up by industry insiders to throw around at dinner parties. Forget about the acronyms because it's actually quite simple.

In finance terms you have two basic options: you can either purchase or lease the vehicle. Understanding which of these options is best for you is the only way to make financing your new car as simple as possible.

The one trait both options share is affordable monthly payments. No matter which route you follow you will pay a deposit / initial rental of some kind followed by fixed monthly payments for the duration of the agreement. You can also factor maintenance agreements and GAP insurance into the monthly cost but as they are optional we'll keep it simple. The main difference between them is in how those payments are kept lower and that is down to what happens at the end of the agreement.

Personal Contract Purchase (PCP) is the option many people are already familiar with. You agree the deposit, monthly payments and contract term in advance. At the end of the term you then have to decide whether to keep the car or hand it back.

If you choose to keep it you will have to make a balloon payment to clear the outstanding value of the car. This is because PCP works in a similar way to an interest-only mortgage. The monthly payments are only paying off the depreciation on the car - basically the difference between what it is worth new minus it's agreed value at the end of the agreement - and not the actual cost of the car. This keeps the monthly payments lower but it means that if you decide to keep the car you then have to pay off the rest of it's value.

For the sake of argument (and simple maths), if you choose a car that costs £20k and the agreed Guaranteed Minimum Future Value (GMFV) is £15k after a three year contract your monthly payments will have covered the £5k difference, but if you want to keep the car you still have to pay the outstanding £15k. You'll know all of the real numbers before you sign so it won't be a surprise, but it does mean that if you want to keep the car you will have to make arrangements to save up that balloon payment as well as meet the monthly costs.

Of course, if you choose not to keep the car you can just hand it back and walk away but that means you then have to start again, which means finding another deposit for your next car. In most cases the GMFV can be a little pessimistic and if your car is worth more than that agreed value at the end of the contract you will have a little bit of “equity” to carry over into the next one. The downside is that if this isn't enough to cover a new deposit you will need to dig around the back of the sofa to find the rest. You could also find that this “equity” can only be used with the same manufacturer so your choice could be limited to just one make of car.

Personal Contract Hire (PCH) is slightly different in that there is never any intention to keep the car at the end of the agreement so you are pretty much immune from the risks of depreciation affecting your next deposit. You also don't have to worry about balloon payments.

You agree a term, an initial rental fee - usually equal to around three months payments, and the monthly payments. When you get to the end you simply hand the car back and choose another one. Although you won't get the benefit of any “equity”, an initial rental fee is usually significantly lower than a PCP deposit would be so starting again puts less strain on your bank balance. It also means that you can easily switch between manufacturers giving yourself a wider choice each time you replace your car.

You will need to keep an eye on maintenance and mileage in both cases as missing a service or running up excess miles will carry penalties, but they may be much higher with a PCH agreement as it will inevitably affect the value of the car when you hand it back. Normal wear and tear is always allowed for and as long as you're sensible about your expectations this shouldn't cause you any problems. Don't agree to do 5000 miles per year to keep the monthly cost down when you know you will easily treble that distance and you won't go far wrong.

There are pros and cons with both approaches. A PCP will work out more expensive if you choose to keep the car but at least you'll own it at the end. You will never own a vehicle on a PCH agreement but then you will never have to pay the full price of a car either. Both will give you the opportunity to drive a car you wouldn't normally be able to afford at a fixed monthly cost, and providing you don't opt to keep your car at the end of the term you also get to change your car every few years. It's a great way to reap the benefit of the latest technology and reliability, and it will keep the Jones' on their toes at the same time.

The benefits of financing your car using either of these options easily outweigh the downsides as long as you choose the right product in the first place. You need to consider what you will do at the end of an agreement before you sign it and ensure that you fully understand all the conditions. The best way to make sure you tick all the right boxes is to give us a call so we can guide you through the process from start to finish.

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