Few purchases depreciate at the speed of a new car. As the theory goes, the car loses value as soon as you drive it off the dealer’s forecourt. However, there are ways to eliminate the negative effects of depreciation – and contract hire is top of the list.
PCH is both cost-effective and easy to manage. This guide to personal contract-hire will explain how it works and who it’s right for.
Personal c/hire is essentially the same as regular contract hire, but it applies exclusively to private individuals. It is the most common form of car leasing and usually what the term ‘car leasing’ is referred to.
With a personal hire agreement you take control of a car for a contractual period ‘lease period’. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments for the duration of the contract. When the lease expires you simply return the car and/or take a new one. As a result you never have to worry about resale values of the car – because you never own it, so you can simply return it and walk away.
It’s important to understand how your payments are determined. The contract hire company will work out the ‘residual value’ of the vehicle – that is its value at the end of the contractual period. To estimate this value, the company will set a mileage limit while you drive the car – exceeding this limit could see you penalised at the end of the term. To determine your payments, the company will deduct the estimated future value (residual value) from the retail price of the car – and you pay the difference in monthly instalments.
There are many advantages to personal-contract-hire including:
There are disadvantages to personal c/hire too, but generally these are based on perception:
If you run a business, you should investigate business contract hire as this will may prove more tax efficient and so cheaper.
For individuals, PCH can be ideal dependent on your circumstances – just think about how you plan to use the vehicle.
If your annual mileage is high, the residual value of the car will drop which will increase your monthly payments. However, contract hire offers fixed monthly payments plus the option to drive a new car every few years. So as long as you don’t mind not owning the vehicle, PCH could be the right solution for you.
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