Various options are on offer if you want to have a new car, but two main options are often compared to each other because they seem the same. Personal contract purchase deals allow you to purchase the vehicle at the end of the contract, whilst personal contract hire deals mean that you have to return the vehicle at the term's end. Your decision whether or not to go for a personal contract purchase (PCP) or personal contract hire (PCH) deal will often depend on your budget and requirements and personal preferences. But whilst these two deals will always have their merits, one deal may be better for you in the long term. But how can you compare the two - and come out on top? Here's a comparison between personal contract purchase and personal contract hire: which is best for you?
The differences
In the past, it was obvious that cash was king. But this doesn't hold any longer, and a majority of consumers choose to finance their vehicle by taking out a PCP or PCH deal. There are similarities between the two but there are some differences as well. With both deals, a deposit is required, and you have to pay a fixed monthly fee. The payments for each can also come with delivery, road tax, warranty, and breakdown cover.
But the similarities end there. One main difference between PCP and PCH deals is that with a PCH deal, you don't have to worry about depreciation since the car is not yours. You will not own it during the contract's length nor will you have the option to purchase it when the contract ends. The risk of depreciation is not something that you will have with a contract hire and leasing deal because you can just return the car when your term is over.
PCP deals explained
With a personal contract purchase deal, you can be the vehicle owner when the term has ended. But this comes with some drawbacks, namely depreciation. Why does it matter? It matters because some vehicles will depreciate at a greater rate than others. Once you begin your term, the provider will work out the worth of the vehicle when the term ends. This is known as the residual value or RV. The 'balloon' payment you make when the contract ends so you can be the owner will be equivalent to the RV. If the vehicle's actual value at the end of the contract is greater than the predicted residual value, you can place the equity into a deposit for another new vehicle. But if the vehicle will hold its predicted residual value, a PCP deal should be a good option. The question is whether or not the car you choose will depreciate well - and this can be tricky to determine.
PCH deals explained
With a PCH deal, you can opt for longer agreements to have lower payments per month. PCH has turned out to be a good deal for those who are happy to have a new car every few years and those who want to drive a luxury vehicle they cannot otherwise afford. You don't have to face any risk of depreciation, either, and it comes with better tax efficiency if you are running a business.
