Should you buy or lease your new car?

More than nine out of every 10 buyers take out some form of finance when buying a new car; 91.3 per cent, to be precise. With 1,052,202 private buyers purchasing a new car last year, that works out at just under a million finance packages issued, as buyers opt to spread the cost of getting behind the wheel of a brand-new car. 

Personal Contract Purchase (PCP) has long been the mainstay of new-car finance, with around 80 per cent of finance customers opting for this type of package, and buyers like the flexibility a PCP deal offers. Pay your deposit, make your monthly payments and then, at the end of the agreement, select one of three options: hand the car back with nothing further to pay, use any ‘equity’ generated during the contract to go towards the deposit for a new car, or buy the car outright by making the optional final payment.

But over the last few years, a change has been occurring in the new-car market. PCP deals remain kings of the forecourt, but an increasing number of buyers are opting for personal contract hire (PCH) instead. PCH deals, also known as personal leasing, differ from PCP in one key area: rather than offering you the chance to buy the car or use any equity towards a new car, PCH customers must hand the car back at the end of the contract, with no option to do anything else. Furthermore, while PCP buyers can walk away early if they have paid off 50 per cent of the car’s value, PCH customers are locked into the contract, with no legal right to leave it ahead of time.

Those constraints mean that PCH deals won’t be right for everyone, but they’re clearly making more sense to more people, with the proportion of buyers opting for a PCH deal nearly doubling between 2015 and 2018. And one look at the savings offered by some PCH deals gives a good indication of what could be driving people to make the switch.

Could PCH be the right financial product to put a 20-plate car on your driveway? To get an expert insight into the new-car finance market, and help you to work this out, we spoke with the Finance and Leasing Association (FLA) – the trade body that represents UK motor finance. 

Trend for ‘usership’ driving change

Adrian Dally, the FLA’s head of motor finance, says that the move towards PCH is partly a reflection of changing consumer attitudes. “We’re moving to a usership culture, rather than an ownership one.

So the long-term trend over 30 years has been wholesale away from hire purchase and personal loans, to usership products like PCP and PCH.

“PCH would in a sense be the ultimate usership product. That’s the fundamental underlying reason why you see that increase, because a small but growing proportion of the population is fixed that is their need.”

Changing Financial Landscape

PCP and PCH both pay off a car’s depreciation

PCP and PCH work in different ways, but Dally says they’re similar products. “In a purely financial sense, PCP and PCH are very similar products – they’re both residual-value products. With PCP you’re borrowing how much that car is going to depreciate over the time you have it, and PCH is worked out in exactly the same way.” The amount that a car is predicted to be worth at the end of a PCP deal is known as its guaranteed minimum future value (GMFV). 

“The way a GMFV is set is critical to making this viable”, Dally says. “From a lender’s perspective, you haven’t got a business if what you lend doesn’t come back to you, so you have to set your GMFV responsibly.

“The typical scenario would be a car costs £20,000. After three years, the data suggests that with your mileage it will be worth £10,000. What you don’t do [as a dealer or financier] is set your GMFV at £10,000; you set it at more likely £8,500 to give you that risk buffer for fluctuations in the car’s actual value, so from a lender’s perspective you’re safe, and from a commercial perspective that may give your customer some equity.”

But PCH deals don’t ever let you build up equity

Many customers taking out a PCP deal find they have built up what’s commonly referred to as ‘equity’ at the end of the contract. This equity is actually derived from buyers having paid more over the course of the contract than the car has actually depreciated, and is caused by GMFVs being set conservatively by dealers, as described above. While you can’t ask for any overpayments to be returned to you as cash with a PCP deal, you can use them towards the deposit on a new car – although typically only as long as you stay within the same brand. 

This equity is, however, a key advantage a PCP deal offers over a PCH: you don’t get a chance to make use of potential equity with a PCH deal – the price you’ve agreed is the price you will pay. So even if you have paid off more than the car has depreciated over the contract, that money is gone – no ifs, no buts. Dally concedes “some may well conclude” that PCP offers a better deal because of this.

PCH is more limiting, so make sure it’s right for you

“With PCH, there is just one option,” Dally says. “You have the car for the fixed period and you must give it back. If you take a PCH, you’ve got to be able to say: ‘I’m going to take this car for three years, I am definitely, 100 per cent certain that I’m going to give it back at the end, and I know that I can afford the payments’. If you’re a customer like that, PCH is the right product for you. At the moment, you’re not in the majority with that attitude.

“There are also differences in consumer protections with PCP. You have a right to terminate early – the 50 per cent rule – so if you’ve paid half of what’s owned, you can simply hand the car back. You don’t get that with PCH.”

What about bank loans and hire purchase?

One look at the table above shows that personal bank loans, and hire purchase agreements – where your monthly payments pay off the car fully, with no optional final payment to make at the end – represent a small and diminishing section of the new-car finance landscape. But a meaningful number of people still choose these routes.

“There is still a proportion of the population who want to own the car, who want legal title,” Dally says. “And if that’s important to you, you may well take out an unsecured loan so you have legal title to the car. But for the majority of people, the concept of ‘my car’ doesn’t entail this.

“If someone can afford half the car already, for example, a bank loan may be suitable,” Dally says. “But it has become a less popular product over the past 30 years. Essentially, if you go for a secured lending product like HP or PCP, it comes with a lot more consumer protections. There’s lower risk with a secured product, so generally speaking, the lender will be able to offer you a lower rate, because the security of the car means there’s lower risk.” 

Number Crunching: PCH deals can offer big savings

Audi A3 Sportback 30 TFSI S line

PCH

• OTR price: £26,030
• Period: 36 months, 10,000 miles per year
• Initial payment: £301.45
• Monthly payments: £301.45
• Total cost over contract: £10,852.20

PCP

• Period: 36 months, 10,000 miles per year
• Deposit: £301.45
• Deposit contribution: £4,000
• Monthly payments: £371.34
• Optional final payment: £11,999.95
• Total cost over contract (returning car): £13,298.35
• PCH saving over PCP: £2,446.15             

Vauxhall Grandland X SRi Nav

PCH

•  OTR price: £27,545 
• Period: 48 months, 8,000 miles per year
• Initial payment: £299
• Monthly payments: £299
• Total cost over contract: £14,352

PCP

• Period: 48 months, 8,000 miles per year
• Deposit: £299
• Deposit contribution: £5,000
• Monthly payments: £335.29
• Optional final payment: £9,569
• Total cost over contract (returning car): £16,057.63 
• PCH saving over PCP: £1,705.63   

BMW 320i M Sport

PCH

• OTR price: £35,465
• Period: 48 months, 10,000 miles per year
• Initial payment: £4,409
• Monthly payments: £399
• Total cost over contract: £23,162

PCP

• Period: 48 months, 10,000 miles
• Deposit: £4,409
• Deposit contribution: £2,721.37
• Monthly payments: £399
• Optional final payment: £13,643.90
• Total cost over contract (returning car): £23,162
• PCH saving over PCP: £0 

VW T-Cross 1.0 TSI 115 SE

PCH

• OTR price: £19,770 
• Period: 36 months, 10,000 miles per year
• Initial payment: £627
• Monthly payments: £209
• Total cost over contract: £7,942

PCP

• Period: 36 months, 10,000 miles
• Deposit: £627
• Deposit contribution: £750
• Monthly payments: £336.83
• Optional final payment: £8,789.40
• Total cost over contract (returning car): £12,416.05 
• PCH saving over PCP: £4,474.05

Have you ever got a new car through either PCH or PCP? Let us know in the comments below…