How is contract hire different to a PCP?

You’ve found the perfect car. You’ve also decided that buying the car outright is not the best option for you. So that leaves you with financing the vehicle and the two most popular ways of doing so are through PCP and contract hire, but what are the differences?

First and foremost, PCP finance gives you the option to purchase the car at the end of the agreement. In both cases you will choose how long you want the car and for how many miles. You will also put down a sum of money at the beginning of your agreement, known as an initial payment, and pay ongoing monthly payments thereafter.

Where PCP differs to a contract hire agreement is the options at the end of the term: you can hand the car back, and most buyers do, or you can pay the balloon payment that was agreed at the contract outset and own the vehicle outright. The luxury of this choice is, however, likely to mean you will pay more for a PCP than you would a contract hire agreement. With a PCP you are paying interest on the full value of the vehicle, whereas with a contract hire agreement you are only paying for the depreciation value of the vehicle over the term agreed.

Unlike with a PCP, if you choose a contract hire agreement will have no option to buy the car at the end of the term. You are essentially hiring your car for a set period based on an agreed mileage and at the end of that term you simply hand the car back. The upside of this is that the leasing company is responsible for taxing the vehicle so you will not have this yearly outlay.

Four out of five people with PCP plans don’t opt to buy the car at the end of their contract (Source: the finance and leasing association). If this is likely to be you, choosing a contract hire agreement will most likely be cheaper for you. Furthermore, if you have chosen to finance your new car based on set monthly payments and you have no intention of buying the car, contract hire is likely to be the most cost effective option for you.