PCP vs PCH: Which type of finance is right for you?

When it comes to choosing your next vehicle, you’ll likely be looking to take it out on finance. But which finance option is right for you? 

Nowadays, personal contract purchase (PCP) and personal contract hire (PCH – or lease) are two of the most popular choices. However, it can be easy to get them confused. 

And before you decide on which one is best for your circumstances, you need to understand the differences and the pros and cons of each. 

Personal contract purchase (PCP)

Personal contract purchase, or PCP, is a flexible finance option that allows you to change your vehicle regularly. 

Instead of your monthly payments covering the entire cost of the vehicle – like with a hire purchase – with a PCP, you only cover the vehicle’s depreciation over the term you’re driving it. 

That means, because you’re not paying the full price, the monthly payments are usually lower than some other financial alternatives. 

A PCP agreement also gives you flexibility at the end of your agreement. For example, unlike with hire purchase (HP), you don’t have to be left with a vehicle to sell – or have to hand the car back as you do with a personal contract hire.


At the end of a PCP, you have options – and it means you can decide on what’s best for you at the time. 

When your agreement ends, you can choose to pay the final balloon payment if you want to keep the car, part exchange the vehicle for another, or hand the car back – like a lease. 

How does a PCP work? 

A PCP is simple, and at the beginning, the same as almost any other type of car finance. 

pcp vs pch

Firstly, you find the car you’re looking for. Then, you decide on how much deposit you want to make – if any – and how long you want the agreement to last. 

However, unlike some other options – such as hire purchase – a PCP is based on your annual mileage. 

To help determine your monthly payment, you’ll need to estimate how many miles a year you’ll be doing. 

That’s because your payments are worked out by taking away how much your car is expected to be worth at the end of your agreement, or your Guaranteed Minimum Future Value (GMFV), against what it’s worth when you start. 

The more miles the car has driven at the end of the term, the less it’ll be worth; therefore, the more miles you do each year, the higher your monthly payments – as you’re covering the cost of its depreciation. 

Once that’s all settled, and you’re happy, you’ll be able to drive the car for as long as your agreement lasts. Then, at the end, you decide to part exchange it, keep it, or hand it back. 

However, unlike other finance options, if you want to part exchange your car at any point during your agreement, you can. That means you can change your vehicle whenever you like. 

Just remember that whatever the car is worth at that point will be put up against the outstanding finance, and if you owe more than your vehicle’s worth, you’ll have to cover the difference. 

Pros and cons of PCP

Pros

  • Low monthly payments
  • Drive a car you may not otherwise be able to afford
  • £0 deposit option
  • Flexible options at the end of your agreement
  • Change your vehicle anytime – although you should consider the financial impact

Cons

  • You have to make a balloon payment to own the car
  • Mileage restrictions
  • Your car may not always be worth its GMFV
  • If you go over your mileage allowance and hand the car back to the finance company, you’ll face charges
  • If you hand the car back to the finance company with damage, you’ll face charges
  • If your car isn’t worth its predicted GMFV, you’ll have to cover the cost if you part exchange the vehicle

Personal contract hire (PCH)

Personal contract hire (PCH) is the formal name for car leasing. Car leasing is a low-cost, low-commitment way to drive the car you want over a set amount of time. 

Like a PCP, you only cover the cost of depreciation on the vehicle, which means you can enjoy lower monthly payments and possibly drive a vehicle you wouldn’t otherwise be able to afford. 

However, at the end of your agreement, you have to hand the car back. There’s no option to part exchange it or keep it; it has to go back to the finance company. 

Line up of cars

After that, you’re free to start a new lease or any other type of finance agreement. 

Many enjoy the low commitment leasing brings with it, as it’s just a long-term rental, and you don’t have any headaches when it comes to getting rid of your car once you’re done with it

How does a PCH work? 

A PCH works similarly to PCP. You find the car you want, pay a deposit if you wish and then set your annual mileage. 

After that, you enjoy the vehicle for the length of your term, then you hand it back and walk away. 

But unlike a PCP, you can choose to include maintenance – such as MOTs and services –  as well as road tax in your monthly payments, giving you less to worry about during the time you drive the car. 

It’s undoubtedly the simplest and most stress-free way to get behind the wheel of the car you want. 

Pros and cons of PCH

Pros

  • Low monthly payments
  • No worry about selling the vehicle at the end
  • Include maintenance and road tax to reduce the chance of extra costs 
  • £0 deposit option
  • Drive a car you may not be able to afford otherwise
  • Hassle-free motoring
  • Own the vehicle in its best years and often under the manufacturer’s warranty
  • Low tax rates for business customers

Cons

  • You’ll never own the car
  • Mileage restrictions
  • You have to see out your entire contract; otherwise, you may face big early repayment charges
  • If you hand the car back with damage outside of fair wear and tear, you’ll face charges
  • If you exceed your mileage, you’ll face charges
  • You have to hand the car back in the same state you took it
Credit score

PCP vs PCH: Which type of finance is right for you?

So, now you understand the basics of PCP and PCH, the differences between the two, and the pros and cons of each, you can decide which is best for you. 

In truth, only you know which suits your circumstances. 

If you want hassle-free motoring with low monthly payments and to drive a new car every few years, personal contract hire is probably best for you. 

However, if you’d rather have the flexibility to part exchange the car or to keep it when your term is up or have the chance to change your vehicle early, personal contract purchase is likely the one you want. 

You can get preapproved for finance and make a decision on what type you’d like to go for, it won’t affect your credit score, and it’ll tell you whether you’re likely to be accepted for car finance.