What’s the difference between PCP and PCH?

We get it, buying a new car is an exciting but potentially pricey job that needs some serious research into how you'll pay for your new wheels. Monthly payment plans are an affordable and flexible way to a new car, but how do you know which one to choose?

Personal contract purchase (PCP) and personal contract hire (PCH) are the two most popular car finance options. Let's take a look at how they compare and help you decide the best option for you.

PCP is essentially a purchase plan. You effectively pay off the cost of a car that you’ve borrowed, with an option to buy the car at the end. The payment at the end helps lower the monthly payments as it offsets the amount you borrowed.

How does PCP work?

With PCP you pay an upfront deposit, plus monthly payments with interest. You can buy, part exchange or return the car at the end.

Who’s eligible for a PCP contract?

To be eligible for a PCP contract you’ll generally need to have a good to excellent credit rating. If you have a poor rating, you might be considered, but your interest rate will probably be higher.

What is the mileage allowance with a car on PCP?

This can vary from contract to contract, but you’ll always decide upfront. You'll have an annual mileage allowance that will be used to estimate wear and tear and, in turn, the car's value at the end. If you exceed the mileage limit, you’ll need to pay excess charges, which can be around 10p per extra mile.

What are the costs of a PCP agreement for a car?

With PCP you’ll pay a deposit, typically 10% of the car's value, but can this vary. If you pay more up front it can help keep your monthly costs down. You’ll pay the monthly cost usually for between two to five years. Your monthly payments are calculated on the basis of the car’s original value and its forecast value at the end of the plan. This is known as the Guaranteed Future Value (GFV). You’ll also need to pay interest on the GFV, typically at 4-7% APR.

At the end, you’ll have the option to buy the car by paying the resale value — aka final payment. You can also use the resale value (minus the amount you still owe) as a deposit for another PCP or simply return the car if you don’t want to keep it.

In summary, Personal Contract Hire:

• Tends to have higher monthly payments than personal contract hire
• Allows you to drive a new car that you might not be able to buy outright
• Requires a deposit and interest payments on the GFV, but you might find the odd 0% deal
• Gives you the option of buying the car at the end of your contract OR at any point during your contract, with an added large final payment

PCH is a long-term car rental with a leasing company, like Octopus Electric Vehicles. You’ll usually drive the car for two to five years and return the car at the end of your contract.

With PCH, you’ll pay an initial upfront payment and then fixed monthly payments. You’ll return the car to the leasing company when the contract ends.

Who’s eligible for PCH?

You’re likely to be approved for PCH with a good to excellent credit rating. If your rating is poor, you’re less likely to be approved. Finance companies may consider the risk too high.

What is the mileage allowance with PCH?

PCH contracts offer different annual mileage allowances. The higher the mileage you choose, the higher your monthly payments will be. If you go over your limit, you’ll pay excess charges, so make sure to choose a realistic mileage plan at the outset.

What are the PCH costs for a car?

You won’t normally need to pay a deposit, because you can expect to make a larger initial rental payment, usually equivalent to six months’ lease. Your monthly payments will be fixed so they won’t fluctuate with Bank of England interest rates.

In summary, Personal Contract Hire:

• Tends to have cheaper monthly payments than PCP, often making it a more affordable option
• Lets you drive a fantastic, high-spec car that you might not otherwise be able to afford
• Means you can choose to lease a new car at the end of your contract with even better technology, so you’ll be able to keep driving the newest cars on the market
• Often includes maintenance and servicing packages, taking the stress out of ongoing maintenance costs and repairs
• Means there's no large final payment becuase you don't buy the car at the end of the agreement - you just hand it back and get a new car

When choosing which type of car finance to go for, there’s no right or wrong choice, it’s all about what works best for you. Both PCP and PCH can be affordable monthly finance options that give you the opportunity to drive a great car that you otherwise might not be able to afford.

If you want to have the option to purchase the car at the end, then a PCP is your best choice. Bear in mind that it’s likely to come with higher monthly payments and a large final payment at the end.

If you prefer the flexibility of upgrading your car every few years, and like the sound of lower monthly payments, ongoing maintenance, and returning your car hassle-free, then PCH is probably your best bet.

Are you looking for PCH that offers great flexibility and cleaner, greener vehicle options? We have just what you’re looking for, and so much more. We'll give you a brand new car, charger, energy, servicing and maintenance, making the switch to electric driving easy. Check out our ultimate EV package.

Still have some questions? Browse our frequently asked questions to find the answers you need, before you decide which option is right for you.