What is car leasing? Personal Contract Hire (PCH) Explained

There are around 1.9 million leased cars and vans on the road in the UK in 2023 across a combination of private and business leasing. But what exactly is car leasing and why do almost 2 million of us choose to lease a car instead of buying one?

This guide will explain car leasing simply and help you understand how it could work for you.

 

What is car leasing?

A car lease gives you access to a vehicle for private or business use, but instead of buying the car, you pay to rent it over an extended duration. 

A car lease agreement (also known as Personal Contract Hire or PCH) is usually set up for a period of between two and five years during which you make regular (usually monthly) payments in return for use of the car.

You can lease more or less any kind of car in the UK (new or used, although most people lease a new car) and it’s open to anyone who meets the provider’s eligibility criteria. That includes a requirement to pass a credit check.

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How does car leasing work?

When you lease a car you hire it from a lease company for an agreed period of time. You don’t own the vehicle with a car lease either during or at the end of the lease. But you have full access to the vehicle, up to an agreed mileage limit.

Here’s a simple rundown of the key aspects of how a car lease works and the steps for getting a lease:

• You decide on a type of car that matches your needs and budget.

• You apply for lease finance with a lease company.

• A lease company will either already have a car that fits the bill or will order and purchase one to suit.

• Your lease agreement will outline how long you’ll be leasing the car for and what the conditions are (e.g. mileage limits).

• You usually make an initial payment that’s the equivalent of three-six months worth of payments (this is essentially a non-refundable deposit), but there are no-deposit car leases too.

• For the rest of the lease term you make a monthly payment.

• You’ll need to cover running and maintenance costs separately.

• When a Personal Contract Hire lease term ends, you return the car to the lease provider and as long as the car is in good condition, you should have nothing further to pay.

• There are also lease options allowing you to purchase pay off the car at the end of the term: Personal Contract Purchase (PCP) agreement or Hire Purchase. 

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Personal Contract Hire (PCH)

How it works: You pay a deposit, then rent the car for an agreed term and at the end of the lease you hand the car back.

Typical finance term: 1-4 years

Mileage limits: Yes

Vehicle modifications allowed: No

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Personal Contract Purchase (PCP)

How it works: You pay a deposit for the car, then make regular payments during the finance term. At the end of the term you have the option to return the car or make a final ‘balloon’ payment to own it outright.

Typical finance term: 1-5 years

Mileage limits: Yes

Vehicle modifications allowed: No

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Hire Purchase

How it works: You pay a deposit for the car, then make regular payments for the finance term, at the end of which you own the car.

Typical finance term: 1-5 years

Mileage limits: No

Vehicle modifications allowed: No

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What kind of cars can I lease?

You can get a car lease for most kinds of vehicles, including:

• New cars

• Used cars

• Vans and other commercial vehicles

• Electric cars

• Hybrid cars

• Petrol/diesel cars

According to the British Vehicle Rental & Leasing Association, almost half (49%) of all new car leases in the UK are for battery electric vehicles (BEVs) and further 14% are for plug-hybrid electric vehicles (PHEVs). Around three quarters are new vehicles leases are for cars, and the remainder are for vans. 

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How much does a car lease cost?

Expect your monthly lease payment to be anywhere between £100 and £2,000+.

The actual cost of your lease will depend on the kind of car you’re leasing and how your agreement is set up. Here’s a summary of the main car lease costs:

Upfront rental: This is a bigger-than-usual rental payment for the first month of the lease. It’s a bit like paying a deposit (non-refundable). It’s usually the equivalent of 3-9 times a standard monthly lease payment.

Monthly payment: This is a fixed amount payable by direct debit each month. This usually only covers the cost of leasing the car itself, unless you agree to a lease with an allowance for maintenance built in. The longer your lease term, the lower your monthly payment will be.

Admin fee: Most lease companies charge an admin fee for setting up and managing the lease. This could come as a one-off upfront cost, a regular amount added to your monthly payment or a combination of the two. There may be additional fees if you amend your contract once the lease begins.

Excess mileage fee: If at the end of your lease you have exceeded the maximum mileage allowance in the lease agreement, a fee will apply.

Vehicle damage fee: If there is damage to the vehicle beyond what’s considered to be fair wear and tear when it’s returned to the lease provider, you may be charged a fee.

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What happens when my car lease ends?

When your lease term ends, you’ll need to return the vehicle to the lease provider in good condition. The vehicle will be assessed by the lease company. They’ll be looking to establish two things:

• Is the mileage on the car within the maximum in the lease agreement?

• Is there any damage to the vehicle?

You may also have the option to extend your lease for a renewed term. You’ll usually be charged a fee for this.

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More questions about car leasing answered

What are the restrictions when you lease a car?

• Because you don’t own the car, you won’t be allowed to modify it, unless you have the lease provider’s permission. It’s unlikely that any modifications that will limit the vehicle’s resale value will be permitted. You can request modifications before the lease begins and these will be reflected in your lease cost.

• There will be a mileage limit, which will be based on your estimated usage of the car. If you go over this, extra fees will apply.

• If you want to take the car overseas, you’ll likely need the lease provider’s permission.

 

Can I get out of a PCH agreement early?

Yes you can, but this can be an expensive decision, particularly if it’s early in the lease. The lease agreement usually includes a clause meaning you will need to ‘pay out’ the lease to cover the loss the lease provider has made due to the vehicle having depreciated in value. 

The typical requirement is a ‘break fee’ of around 50% of your remaining repayments.

 

Do I own the car at the end of the lease?

No, under a PCH lease agreement you do not own the vehicle at the end of the lease and there is no option of ownership. But you may have the option to extend the lease.

 

Will I need to do an MOT for the car?

If you’re leasing a used car that’s due an MOT (i.e. it's three years old) or your new car lease runs past three years, it’s usually you who’s responsible for covering the cost of the MOT.

 

Do I need to buy insurance when leasing a car?

Yes it’s a legal requirement for the vehicle to be insured, as well as a requirement under the lease agreement. You are responsible for paying for the insurance although some leases allow you to package the insurance into your monthly lease cost.

 

Is leasing cheaper than buying?

Leasing a car means much lower upfront costs and in most cases you will have paid less for the car than you would have had you bought it. 

The big difference with a lease is you don’t actually own the car when the lease ends, whereas if you buy the car you can recoup some of your costs by selling it.

 

What credit score do you need to lease a car?

To lease a car under the best terms, you’ll need to have a ‘good’ credit score or better. It’s often still possible to lease a car if you have a lower credit score, but you will almost certainly end up paying more than someone with good credit.

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