Home Finance A new lease of life: the cost benefits of PCH versus PCP

A new lease of life: the cost benefits of PCH versus PCP

by wrich gbaf

By: Paul Harrison, Head of Strategic Partnerships at Leasing.com 

The shops are open, the kids are back at school and most of us have made our return to work, meaning car usage and motoring requirements are on the up. 

Indeed, insight from Leasing.com – the car leasing comparison website – shows that new vehicle enquiries increased by almost 20% in the first nine months of 2021 versus the same period in 2020.

So how are consumers funding their new cars? The latest data from the Finance & Leasing Association (FLA) revealed that 94% of private new cars were financed in the 12 months to August 2021 using specialist motor finance. Namely,  hire purchase, personal contact purchase (PCP) and personal contract hire (PCH).

The two most popular forms of new car finance are PCP and PCH, but what are they and what’s the difference? 

The key difference between leasing and PCP is that there is no option to own the vehicle under a lease agreement. Customers hand the car back to the leasing provider at the end of the term and find their next vehicle; with PCP, customers have an option to buy the car outright at the end of the agreement by paying off the optional balloon payment, which is the predicted future value of the vehicle at the time of underwriting (and is often many thousands of pounds). Most consumers, however, hand the car back for a newer model, meaning they are already ‘leasing’ in all but name, yet paying more than they need to for the ownership option they do not exercise.

Economic comparisons between the two make for interesting reading. In August we compared the ten lowest total cost leasing deals on economy vehicles with the equivalent manufacturer PCP* offer. We found average total saving of £1,794.46 for leasing customers over the total agreement. The monthly savings of leasing, meanwhile, averaged at £42.72 compared to a PCP agreement. 

Across the 10 models that were compared, leasing was cheaper than PCP on all but one, with some deals saving customers over £5,000. For example, leasing a Fiat 500 cost £8,409.52 across a 48-month term, whereas the total PCP cost for the same vehicle was 13,827.24.

Across some of the most popular models within the premium categories, leasing customers could save even more, with a BMW 3 series saving drivers £5,274.47 on a PCH contract. Similarly, the Volkswagen Golf, one of the UK’s most popular hatchbacks, cost £3,026.36 more on PCP.

PCH has many other advantages over PCP besides the potential monthly savings. For consumers who are mindful of their credit profile, both PCH and PCP products are shown as a debt on customer’s credit file. However, a PCP debt reflects the full vehicle value while PCH assumes the total amount of lease payments due under the agreement which will be less.

In addition, vehicle excise duty (VED) commonly known as road tax, is included within leasing contracts, and incorporated into the cost of the monthly rentals paid by consumers. It potentially offers further savings of hundreds of pounds a year over PCP, depending on the vehicle. Maintenance is usually available as an optional add-on to leasing contracts and, if taken, is incorporated into the monthly rentals. This is in addition to the manufacturer’s warranties and the ever-increasing service intervals for new cars that provide peace of mind and affordability for consumers.

Leasing also affords greater flexibility. Motorists can specify the model they want, the annual mileage required, the contract length, and the total upfront payment. This flexibility provides an ideal way for customers to test the latest technology, including new electric vehicles (EVs), giving customers the chance to trial these without making long-term financial commitments. With the cost of EVs one of the barriers to adoption, we expect leasing to increasingly become a gateway product to zero emission motoring. 

Every motorist and their household will have unique needs. However, with new car costs increasing, it is crucial that consumers carefully consider all of their new car financing options. Our research shows that, generally speaking, the total cost of PCH is lower than the equivalent PCP agreement for both economy and premium new cars.. 

*Source: New car leasing offers advertised on Leasing.com in August 2021 were compared against motor manufacturer new car PCP offers on identical vehicles compiled by Automotive Management Online:https://www.am-online.com/retail-new-car-finance-offers/all/


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