Private Car Lease: Personal Contract Purchase vs. Personal Contract Hire
A private car lease is an excellent choice for drivers not eager to own a car but wanting to take advantage of lower monthly car payments. There are two options when you lease a vehicle: a personal contract purchase and a personal contract hire. Simply known as a PCP and a PCH, respectively, each type lets you enjoy the benefits of car leasing, but there a major distinction between the two. A personal contract purchase essentially gives you the option of purchasing the vehicle after your lease expires, while a personal contract hire does not. That major distinction aside, there are a number of reasons to opt for a car lease, whichever type you choose.
Benefits of a Car Lease
A car lease obligates you to pay only on the amount of depreciation of the vehicle, not its full cost. A new leased vehicle is estimated (and in some cases guaranteed) to be worth a certain amount at the end of your lease, assuming you do not put an unnatural amount of wear and tear on the vehicle or total it. This amount is known as the car's residual value. The residual value plus any down payment you put is subtracted from the car's sticker price. The difference represents the depreciation, and that is what you must pay on plus any finance charge. Thus, if you were to purchase a car for $25,000, you would make monthly payments to the tune of whatever you borrowed to entirely purchase the car plus interest. If you lease the same car and it's estimated to be worth $15,000 after 3 years, even without a down payment your monthly payments will only be for the $10,000 difference plus financing fees. You may not end up owning the car, but your payments are much lower.
Personal Contract Purchase
This type of lease deal is structured so that you have the option of buying the car when the lease expires. You can opt to return the car without purchasing it, though. The downside to this arrangement is that to purchase the car you must come up with a balloon payment equaling the remaining amount of the car's value. If, for some reason, the car is deemed to be worth less than estimated, if you decide to return it, you will have to pay the leasing company the difference between its estimated residual value and its actual worth. In that case, depending on the difference, making a balloon payment may be a better option. You will also own the car at that point, too. Rather than make a balloon payment, you can often refinance the amount you owe and continue to lease the same vehicle.
Personal Contract Hire
With a personal contract hire, you never have the option to buy the vehicle after the lease has expired. In all cases you must return the car. You may be assessed fees for exceeding the allotted mileage or running the car ragged, but provided the car is worth its estimated residual value, you simply return it and walk away. If the term of the lease is short enough, the vehicle will likely be under warranty the entire lease period, so maintenance is not a concern.
Consider both types of private car lease for their respective benefits and drawbacks. Remember, with a PCP you are able to purchase the car at the end of the lease, so if it's important for you to own the car, opt for that lease option rather than the PCH.