How does car leasing work?
Leasing a car is effectively long-term rental – you pay a fixed monthly fee to use the car for an agreed time period and number of miles.
You’ll need to pass a credit check to secure your agreement.
Find out more about how to improve your credit score .
Car leasing credit checks won’t assess your other outgoings to make sure you can afford the payments. This means you need to make sure the costs are within your budget.
To get out of a PCH deal early you may not be able to just walk away from the agreement. All finance companies are different but most will allow you to leave the agreement early for a fee, the amount is dependent on how long is left on your lease.
How do I finance a car with Personal Contract Hire?
If you’re looking to hire a car long term and don’t want to buy it, the cheapest option is likely to be using PCH. Here are the details:
- The lease agreement lasts 2 to 5 years.
- You will need to undergo a compulsory credit check.
- You have to pay a lease payment up front, this can be anything from 1-12 payments but the decision on how many is yours.
- You never own the vehicle during the agreement and have to hand it back at the end of the term.
- Monthly payments are normally higher than for equivalent vehicles leased through PCP, but over the entire contract you’ll typically pay less on a PCH.
- You can get a maintenance package that covers things like servicing, tyres, AdBlue top ups.
- Road Tax (Road Fund License) is included on leasing agreements.
- There are strict terms and conditions, like limits to the number of miles you can do.
The big difference between PCP and PCH: buying and owning the vehicle
While PCP can be used as a way of leasing a car, it also gives you the opportunity to buy the car and become its legal owner at the end of the leasing contract. PCH does not.
To do this, you have to pay a ‘balloon payment’ – also known as the Guaranteed Minimum Future Value (GMFV) – at the end of the contract. This is in addition to your deposit and monthly payments, and will be a few hundred or thousand pounds.
With PCP the total amount you repay in monthly instalments is based on an estimate of how much the car will lose in value though depreciation between the start and end of the contract.
If at the end of the contract you don’t want to buy the car, you simply hand it back. As long as the car is in good condition and hasn’t exceeded the agreed mileage, you won’t have to pay any more money.
With both PCH and PCP the lender can repossess the car without a court order. But with PCP, once you have paid at least a third of the total amount payable, they can’t repossess it without a court order.
What to do if you’re getting behind on car finance payments
Return the car
As long as you’ve paid (or can pay) half the cost of the car, you have the right to return it. For a PCH, there can be further charges, so check your agreement.
Talk to the finance company
They might offer to extend the length of the lease, which would lower your monthly payments, or come to some other arrangement to help you out.
What happens at the end of the lease?
Once your agreed contract term has run out, two things can happen. The first is that you could choose to extend the lease on the car – it’s worth contacting the finance company a few months before the end of the deal to check it will allow this, and whether it’ll offer a discount on the monthly payment as it’s now an older car.
Alternatively, you can choose to hand the car back. If it’s in good nick, and you’ve stuck within the agreed mileage, then there’ll be nothing else to pay. Usually the finance company will collect the car for free. Again, it’s worth contacting it a few months before the end of the deal to arrange the handover – though it may contact you.
If you’ve gone over the mileage limit, then you’ll need to pay a charge, which is usually between 3p and 10p per mile, but can be higher if you leased a premium car model.
Similarly, if it’s not in good condition, you’ll face a bill for that. What the finance company is looking for is a car in saleable condition. So, if it’s covered in dents and scrapes, then you’re going to need to pay to make things right.
Remember, the car is owned by the finance company. You have no option to buy it, and you can’t sell it.