New cars are renowned for their rapid depreciation, with their value falling the moment you leave the dealership forecourt. However, there are ways to reduce the effect depreciation has on your pocket, and personal contract hire is just one of them.
Similar to contract hire, personal contract hire is intended for private individuals as opposed to companies and is the most common form of car leasing. You’ll generally find that if someone says they lease their car, they’re likely to have a personal contract hire agreement.
A personal contract hire agreement involves you taking control of a car for an agreed period of time – the lease period. However, despite being in your possession you do not own the car. Instead, rather than paying for the car outright, you make fixed monthly payments for the duration of your lease period. When your contract comes to an end you can either return the car to the lease company and walk away, or you can also take out a new lease – you’ll find our latest offers here. Because you’ve got the freedom to simply walk away from the vehicle after two, three of four years, you don’t have to worry about the resale value, you can just enjoy all the great things about owning a new car.
The amount you pay each month is determined by working out the residual value of the car. The residual value is the amount the car is estimated to be worth, taking depreciation into account, at the end of your contractual period. In order to work out this value, your annual mileage will be taken into account. This means it’s really important to stick to your mileage limit or you could be faced with a hefty bill at the end.
Once all of this has been taken to account, the estimated residual value will be deducted from the retail value of the car and your monthly payments will be the difference divided into 24, 36 or 48 monthly payments.
Advantages of personal contract hire
- Personal contract hire is perfect for budgeting, you pay a set amount each month for a set amount of time with no hidden charges – what could be better?
- Personal contract hire comes with a low initial payment which means it’s affordable to everyone. Generally, payments are either 3 or 6 months up front
- VED (road tax) is included for the duration of your contract
- Personal contract hire payments are generally much cheaper than the repayments on a personal loan
- You’ll have the option to include a maintenance package to your car. This is another monthly set fee and will be added onto your repayment. Our maintenance packages include servicing, tyres, breakdown and MOT where relevant
- As you don’t need to sell the car at the end, there’s no need to worry about the depreciation
- Personal contract hire opens up a whole market of vehicles that would otherwise be unaffordable. Remember also, luxury vehicles generally depreciate at a slower rate and therefore tend to offer the best rates on a personal contract hire agreement
Disadvantages of personal contract hire
- You cannot opt for a lower level car insurance. With a personal contract hire vehicle you must have comprehensive car insurance
- You will never own the vehicle and do not have the option to purchase the vehicle at the end
- You’re restricted to a pre-agreed mileage limit and if you go above your contracted mileage you’ll have to pay the excess mileage charges (these depend on the finance company)
Who should choose personal contract hire?
Personal contract hire is perfect for anyone looking for a brand-new car at an affordable price. If you struggle with your outgoings and need to make sure your monthly payments are the same every month, then personal contract hire is perfect for you too.
Be aware, if you intend to use the car to make long journeys regularly, then the residual value will be less and therefore your monthly payments will be higher.
Personal contract hire is not for business owners, for information on business contract hire and the tax savings available, take a look at our dedicated page.