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Leasing VS PCP & HP? Car finance explained

There are already hundreds of guides out there that go into detail about Leasing, PCP & HP. Hopefully our guide will simplify everything and make the process easy for you to understand.

Deciding how to finance your car is an important decision which many of us are increasingly making. 

But how much do you know about it? 

This guide will talk you through three particular types of finance that are standard within the industry. Leasing or Personal Contract Hire as it's often called, PCP which stands for Personal Contract Purchase and HP which stands for Hire Purchase.

Leasing/PCH (Personal Contract Hire)

Personal Contract Hire (PCH) is a type of long-term rental that will suit you if you’re not looking to buy the car at the end of your contract and won’t need to change the car before the end of the contract.  For your leasing contract, you will select your expected annual mileage and contract length, as well as optional spec extras (cruise control, panoramic sunroof etc) and maintenance packages. You never own the vehicle. You lease the car for an agreed period of time by making fixed monthly payments. When the contract expires, you simply return your car.

It’s hassle free, as you can drive away a new car without worrying about how you'll re-sell it. Most leasing companies will offer an option with maintenance built in, eliminating unexpected repair bills. Your monthly payments on the car will be much lower than if you were buying it You will have access to new cars that you may not have been able to afford to buy.

Things to bear in mind 

There’s no option to buy the car at the end. You will need to agree an annual mileage allowance at the beginning of your contract – there may be a mileage charge if you exceed this. Just like your mobile phone contract, you are tied in for the full duration of the agreement and there may be significant charges if you need to change or stop the contract.

PCP (Personal Contract Purchase)

Like other types of finance such as leasing or loans, PCP allows drivers to spread the payments for a vehicle over a long period, typically two or three years. PCP is a bit like hire purchase, but there are some important differences. You pay a deposit on the car you want and make monthly repayments until the end of the term. When the term ends, you then have a choice: you can make a lump sum payment – known as a balloon payment – in order to purchase the vehicle outright. Alternatively, you can use any equity they have in the deal – if the car has maintained more of its value than expected – to put down as a deposit on a new vehicle, via a new PCP deal.
If you decide not to buy the car, you can simply walk away when you've made all the payments.

Things to bear in mind 

If you want to buy the car you will need to pay your final balloon payment (the Guaranteed Future Value). Similar to PCH, you will need to agree on a mileage allowance at the beginning of your contract and there may be excess mileage charges if you exceed this. You won’t be able to sell the car without settling the finance. You won’t own the car until you have made all of your repayments. You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.

HP (Hire Purchase)

HP or Hire Purchase is similar to PCP as you put down a larger, smaller or no deposit which will, in turn, affect your monthly payments. The contract length is decided by yourself when being set up is typically two or three years. The main difference from PCP is that with HP you will automatically own the vehicle at the end of the contract. You can't give the vehicle back and walk away. 

Things to bear in mind 

Monthly payments may be higher than some other finance options, such as PCP, as you're paying off the full value of the car. You won’t be able to sell the car without settling the finance. You won’t own the car until you have made all of your repayments. You’ll need to keep the car properly insured, maintained and in your possession until the full value is paid off.

Deposits

Leasing requires an initial rental which is paid two weeks after your vehicle is delivered to you 

PCP often requires an upfront deposit

HP often requires an upfront deposit

Early Contract Termination 

With Leasing, you can terminate the contract early but you have to pay a substantial penalty fee decided by the funder 

With PCP, you cannot terminate the contract early but you can get a final settlement price 

With HP, you cannot terminate the contract early but you can get a final settlement price

Risk of Depreciation

Leasing has no risk of depreciation as you hand the vehicle back 

PCP has no risk of depreciation should you choose to hand the vehicle back and a risk should you choose to keep it 

HP has a risk of depreciation as you are the owner of the vehicle at the end of the contract

Excess Wear & Tear Fines

Leasing has excess wear and tear fines for damaged vehicles when they are handed back at the end of the contract 

PCP has excess wear and tear fines for damaged vehicles when they are handed back at the end of the contract 

HP has no excess wear and fear fines

Hopefully, this guide will have answered any questions you have about which type of vehicle finance option is best for you. If not, please feel free to call us on 01772 737383 or email sales@keyfleet.co.uk and we can help you find the best solution.  

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Disclaimer: All vehicle images and descriptions are for illustration and reference purposes only, all vehicle leases are subject to credit approval and subject to change at any time. E&OE.

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