Private car leasing

There are many different methods of car finance, but one of the most cost effective is private car leasing. However, just what is private car leasing and how does it work? This guide to private car leasing will put you in the driver’s seat.

Quick links:

• What is private car leasing?
• What is personal contract hire and how does it work?
• What is personal contract purchase and how does it work?
• Which method of private car leasing is right for you?

What is private car leasing?

Private car leasing (also known as ‘personal car leasing’) is when you pay a monthly sum to drive a car, over a pre-established period, usually around two-four years, but the car is never actually yours.

Payments are based on the difference between the retail price of the car (what it is worth when the agreement starts) and the residual value (what it is estimated to be worth at the end of the contract period). Therefore, the less the car depreciates in value, the lower your payments will be.

Broadly, a private car leasing agreement can be established with one of two methods – personal contract hire (PCH) or personal contract purchase (PCP).

What is personal contract hire and how does it work?

A personal contract hire agreement is the most common form of private car leasing. In this process you make monthly payments to a leasing company over a fixed period in order to drive a car. The car is never yours – effectively you are hiring the vehicle, but over a longer period and therefore at a cheaper rate than a traditional hire car. At the end of the term you simply hand the car back to the leasing company and walk away – or you could choose to take out another lease.

There are several restrictions that accompany this form of private car leasing. For example, a leasing company will usually set a mileage restriction which you cannot exceed or else you could be penalised. This is because the leasing company uses this mileage limit to estimate the vehicle’s worth at the end of the contractual period – and therefore this establishes your monthly payments.

What is personal contract purchase and how does it work?

Personal contract purchase works in exactly the same way as personal contract hire – but with one twist. This form of private car leasing gives you the option to buy at the end of the lease period.

A balloon payment is established between you and the leasing company at the beginning of the agreement. An estimate is made on what the car will be worth at the end of the lease period – in other words, its residual value or minimum projected cost. Once the lease period expires you can choose to make this payment to take ownership of the car. Alternatively, you can return the car to the leasing company.

Which method of private car leasing is right for you?

Both PCH and PCP have a lot in common that make them advantageous as methods of car finance – both require only a small initial deposit, there is no risk of residual value loss, you have low-cost fixed motoring costs and you can change your vehicle frequently.

Choosing between the two methods of private car leasing is dependent on your circumstances.

PCP is generally preferred by private motorists who want to drive the car of their choice without risk. If the car lives up to expectations you can complete the purchase at the end of the lease period. If it doesn’t, or something better comes on to the market, you can return it and walk away.

By contrast, PCH is often preferred by customers who want a car that would normally be unreachable in terms of its price. You can make monthly payments to drive a quality car, and then return it and/or upgrade at the end of the lease term.

Whichever method of private car leasing you choose be sure to search from the listings at contracthireandleasing.com to compare thousands of deals.