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What’s the difference between Personal Contract Purchase (PCP) and car leasing?

PCP and leasing are two different ways to get a car through monthly payments – our guide will explain the differences between the two

Car finance

PCP vs. car leasing

When it comes to ways of financing a car, there are a few options to choose from. Each finance method has its own benefits and things to consider.

Personal Contract Purchase (PCP) and car leasing (also known as Personal Contract Hire or PCH) are both ways to secure a new car through monthly payments.

With PCP car finance, you’ll have the option to keep your car and pay off the full balance at the end of your contract.

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Car leasing is different, as you won’t have the option to keep the car and will return it to your lease company when your contract ends.

Below, you'll learn what makes PCP and PCH different and be able to decide which is the best way to get your hands on your next car.

What is PCP car finance?

Personal Contract Purchase (PCP) is a type of car finance that allows you to pay for your car across an initial deposit and monthly payments, with one final balloon payment at the end of your contract to take ownership.

Once you’ve paid your initial deposit, you’ll then begin your monthly payments until you reach the end of your agreement. At this point, you’ll need to decide whether you want to pay your balloon payment and keep the car.

You can also choose not to pay the final sum and return the car to your lender.

You’ll have the payments set out by your car finance provider at the start of your contract, so you’ll know just how much your balloon payment will be.

PCP contracts usually last between three to five years, so you’ll have plenty of time to decide if this is the car for you. If you’re ready to move on, you can return your car to the lender.

It’s important to consider excess mileage and damage charges with PCP finance, as any mileage over your agreed limit or damage to your car over normal wear and tear can mean fees. This will be laid out in your contract.

Benefits of PCP car finance

  • You’ll have the option to hand back your car at the end of your contract

  • Spreading the cost across monthly payments can make getting a car more affordable

  • You can still return the car early through voluntary termination if you’ve paid at least 50% of the balance

Things to consider before you choose PCP finance

  • You’ll usually have to pay a deposit at the start of your PCP deal

  • You may have to pay damage charges and excess mileage fees if you hand the car back

  • You can’t sell or modify your car until you’re the legal owner

Car finance

What is car leasing?

Leasing (also known as Personal Contract Hire or PCH) is similar to PCP, as you’ll still be making monthly payments towards your car throughout your contract.

If your lease contract requires an initial payment, you’ll start your contract by paying your chosen amount.

This will be equivalent to your chosen number of monthly payments, usually ranging between three to 12 months.

Your initial payment will then be deducted from your total amount payable, meaning the amount left to cover your monthly payments is lower.

For example, if your monthly payments are £100 a month and you choose to cover three months with your initial payment, £300 will be deducted from your total amount payable.

Contracts with no initial payment are available, so it will depend on what you choose.

You should also bear in mind that, unlike some deposits, an initial payment is not usually refundable.

With leasing, you won’t have the optional balloon payment at the end of your contract and will have to return your car to the lease company.

You’ll usually have your lease car for between two to four years, with the option to easily swap to a new model at the end of your contract.

Just like with PCP finance, there will be excess mileage charges and damage fees if you don’t stick to the guidelines of your contract.

At the start of your deal, your lease company will lay out what’s classed as fair wear and tear, and how many miles you can cover.

We don't currently offer car leasing at cinch, but we do offer different types of car finance.

Benefits of leasing

  • You can enjoy a car for a set period and swap it for a new model easily when your contract ends

  • The monthly payments can make choosing a newer car more affordable

  • Schemes without initial payments are available

Things to consider before you lease a car

  • You'll usually have to make an initial payment at the beginning of your contract in place of a deposit

  • Usually, there’ll be no option for you to buy and keep your lease car

  • You could face extra fees for damages and excess mileage

How are PCP and car leasing different?

The main difference between PCP and leasing is that leasing is a type of long-term rental, whereas PCP means you’ll have the option to buy.

Unlike PCP, you won’t usually pay interest on a lease deal as you’re not buying the vehicle.

You will still have the added ‘money factor’ to pay on top of your lease price.

Most people choose to lease brand-new cars, but you can also lease used models as well. PCP car finance can also be used with either.

If you want to end a lease deal early, you’ll usually have to pay an early termination fee to be able to hand your car back.

With PCP finance, you can end your car finance early by settling the outstanding balance or choosing voluntary termination.

By choosing termination, you’ll be able to hand back the car with no further payments if you’ve already paid at least 50% of the balance.

PCP also gives you the option of utilising any potential equity towards a new car. If your car is worth more than the optional final payment, you can trade in your car with your lender and use the equity towards the cost of a new one.

Is car leasing or PCP finance better?

There are positives and drawbacks to both PCP car finance and car leasing – the best option will depend on your individual circumstances.

If you’re someone who likes to get the newest cars and swap them regularly, leasing is an easy way to do this.

PCP gives you more options at the end of your agreement, allowing you to choose whether to return the car or pay the final payment and keep it.

You’ll also have the option of trading your car in and using any potential equity towards a new one, whereas leasing requires you to start a fresh deal with a new initial payment with each new car.

PCP isn’t the only type of car finance that gives you the option to become the owner of a car – Hire Purchase (HP) and a personal loan might also be a good choice.

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