Types of car leases

Types of car leases

With so many different types of car lease available, it can be difficult to know which works best for you. Each offers something slightly different, and in thistoday’s post we’ll look at the pros and cons of each of them, in turn. We’ll touch on PCP, different types of hire agreement, and finally, the benefits of all-inclusive car subscriptions as a convenient alternative.

Personal contract purchase (PCP)

Personal contract purchase, or PCP, has become an incredibly popular way to buy a car, with the Finance & Leasing Association estimating that 74% of new cars are now purchased this way. PCP isn’t technically leasing, as you’re effectively spreading the cost of buying a car, paying monthly instalments that include the interest on the value of the car. The other main difference from buying a car outright is that you have the option to hand it back at the end of the contract period.

PCP typically ties you in for two to four years, with an upfront deposit usually the equivalent of six months of payments or 10% of the car’s value. At the end of your contract period, you can either give the car back, change it for a different one on a renewed PCP contract, or pay a final sum known as a ‘balloon payment’ to buy the car outright. The amount you pay is based on the expected value of the car at the end of the contract period – so you could pay over the odds if the market isn’t doing so well.

PCP is popular because it allows you to spread the cost of buying a car, with a lower upfront payment than would be required to buy a car outright. It can be a good option if your goal is to end up owning a car that you wouldn’t have been able to afford to pay for upfront and if you’re sure you won’t exceed the agreed annual mileage.

However, PCP does tie you into a lengthy contract, typically between two and four years, which can be costly to get out of if your circumstances change. You’ll need to stick to the annual mileage, as the final payment is based partly on how many miles the car is expected to have done – you’ll likely have to pay charges if you go over the limit. What’s more, you’re still responsible for all the running costs of the car in addition to the monthly payment you make for it, so you’ll need to budget extra for things like tax, insurance and maintenance.

Personal contract hire (PCH)

Personal Contract Hire (PCH) is similar to PCP, but you don’t have the option to buy the car at the end of your agreement. As the name suggests, you’re hiring the car, not purchasing it. PCH typically offers lower monthly payments than PCP, with no balloon payment at the end. You’ll be able to enjoy driving new cars without thinking about how much they’re depreciating.

However, you’ll still have a fairly high upfront payment to think about – typically the equivalent of six months’ rental payments – and you’ll be tied into a contract for anything from two to five years, which can be difficult if your circumstances change. As with PCP, you’re responsible for all the additional running costs of the car, such as insurance, tax and maintenance. You’ll also need to stick to the agreed mileage or pay a penalty if you go over, and you can expect to have to pay for any damage to the car. 

Business contract hire (BCH)

If you’re a business owner – whether sole trader, partnership or limited company – you might be considering Business Contract Hire (BCH). This is similar to PCH, but it’s designed for businesses. The car (or van or pick-up truck) is therefore linked to your business as an asset, rather than to you as an individual.

Like PCH, BCH is effectively a long-term rental, so your business doesn’t get the option to buy the vehicle at the end of the contract period – but you also don’t have to worry about selling it or depreciation.

You’re typically tied in for a minimum of 18 months, so if your business goes through a rough patch and you need to reduce your overheads, your vehicle will be one thing you’ll need to keep paying for. Again, you’ll also need to budget extra for running costs, such as maintenance and insurance.

Hire purchase

Hire Purchase (HP) is similar to PCP, except that the (usually higher) monthly payments you make cover the whole cost of the car, plus interest and minus the initial deposit, which is typically 10% of the car’s value. At the end of the contract period, you actually own the car and can sell it yourself if you don’t wish to keep it. There aren’t usually the same mileage restrictions as for other types of leasing.

HP agreements usually run for between 12 months and five years, and you’ll pay more in interest for a longer period. The value of the loan is secured against the car. You’ll only own the car when you’ve made the final monthly payment, and you won’t be able to modify or sell it before then. If you can’t keep up with the repayments, the car may be repossessed. Remember, like the other leasing options, you’ll need to budget extra for all the running costs.

Overall, if you’re only looking for a short-term agreement then HP probably isn’t the leasing model for you, but if you (or your business) eventually want to own the vehicle, and/or don’t want the mileage restrictions of PCH or BCH, HP could be an option.

All-inclusive car subscription

All-inclusive car subscriptions are similar to hire agreements, but with a couple of crucial differences. The first is hinted at by the term ‘all-inclusive’: your monthly payments include pretty much all the running costs of the car, such as road tax, insurance, maintenance, breakdown cover and so on. All you need to cover is fuel or EV charging, so it’s much easier to budget for, and you’ll be free from the worry of unexpected repair bills.

There’s no big upfront payment with a car subscription, either, and you won’t have to worry about financial commitment or depreciation. You’ll only have to pay one month’s subscription fee upfront, which you get back when you hand the car back, providing the vehicle is returned in a condition within wear and tear guidelines. The other key difference between car subscriptions and other types of lease is that you’re not tied into a lengthy contract – you’re only ever committed to a month at a time. 

Car subscriptions mean that if your circumstances change, it’s easy to change the car for something more suitable, or simply hand it back. You’re also not stuck with the same car for years, so it’s also a great option if you’re looking to try out a few different cars before buying.

In summary

There are many different ways to enjoy the benefits of having a car, so it’s a question of finding the right option for your needs and lifestyle. If you’re after complete flexibility and want to be able to adapt to changing circumstances, being tied into a PCH or BCH agreement for years at a time may not be for you. Unless you’re set on eventually owning your own car, PCP or HP may not be right for you and there are also significant upfront costs, with depreciation as an added thing to consider. Of course, all the lease options we’ve talked about today require you to budget extra for running costs, which can be unpredictable.

Car subscriptions are a convenient and flexible alternative to traditional car leasing options, giving you the freedom to hand the car back with just one month’s notice. Find out more about how you can liberate yourself with a car subscription so that you can focus on the things that matter to you.

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