There are many different ways to spread the cost of your car purchase, some better than others.
Here we offer some basic information which may assist in helping you assess which may be best for your personal situation.
WHAT IS THE DIFFERENCE?
Contract hire is actually a form of leasing. ‘Leasing’ is a generic term encompassing finance leasing, lease purchase and contract hire.
CONTRACT HIRE
Contract Hire is an agreement where you lease the use of the car from a company for a fixed length of time, usually 2-3 years. Regular repayments will be determined at the start of the agreement and continue to the end. You never actually own the car and you have to give it back at the end of the term.These payments will be plus VAT which you can only claim back if you are VAT registered.
PERSONAL CONTRACT PURCHASE (PCP)
Personal Contract Purchase (PCP) is broadly the same as a contract hire agreement, but with one key difference. At the end of the term, you have the option to pay a pre-agreed balloon payment to take ownership of the car.
Monthly payments are based on the deposit amount and the difference between the retail value of the car and it’s residual value – i.e. the estimated future value of the vehicle. Therefore, the better the vehicle holds its value, the lower your monthly payments will be.
A mileage limit may apply to all personal contract purchase deals. This is because the
mileage will determine the vehicle’s depreciation and therefore its residual value. It’s important to be honest about how many miles you are likely to do – exceeding the mileage may lead to financial penalties at the end of the agreement.
HIRE PURCHASE (HP)
Hire Purchase (HP) combines elements of both a loan and a lease. You pay an initial deposit, typically anything from 10% upwards, you then pay off the balance in monthly instalments over an agreed period of time. At the end of this period, you are the legal owner of the car with no final instalment or balloon payment to pay.
Unlike a lease or a personal contract purchase agreement, the residual value of the vehicle is not taken into account. Instead your monthly payments are determined by the retail price of the vehicle, the size of the deposit and the length of the contract.
