PCH vs PCP: which is right for you?

PCH and PCP: the basic difference

Personal contract hire (PCH) is a lease. You pay a fixed monthly rental to use a car for an agreed term and mileage, then hand it back at the end. You never own the car and there is no option to buy it. For a full rundown of how the mechanics work, see how car leasing works.

Personal contract purchase (PCP) is a finance agreement that leads toward ownership of the car, if you want it. You pay a deposit, then monthly instalments that cover only part of the car's value, with the rest due as an optional final payment known as the balloon or guaranteed future value (GFV). Pay that balloon and the car is yours; walk away instead and you simply hand it back.

Both are built on the same principle, you pay for the use of a depreciating asset rather than its full value upfront. The difference is what happens to that final chunk of value at the end of the agreement.

Deposits and monthly payments

PCH deposits are usually quoted as a number of monthly rentals paid upfront, commonly one, three, six or nine months' worth. A larger initial payment lowers the monthly rental but does not change what you get, since you are always handing the car back regardless.

PCP deposits work differently. You can usually put down anything from nothing at all to several thousand pounds, and the amount chosen directly reduces the sum being financed. Put down more and both the monthly payment and the size of the optional final payment can fall.

To illustrate how the maths typically works, rather than any real quote, imagine a hypothetical car costing around £28,000. A PCP deal over three to four years might involve a deposit of a few thousand pounds, monthly payments somewhere in the £250 to £400 range, and a final balloon payment that could fall anywhere between £8,000 and £14,000 depending on the predicted residual value. The same car taken on PCH, with no ownership option and no balloon, would typically carry a noticeably lower monthly rental over the same term, since every pound paid goes toward use of the car rather than part-funding eventual ownership. These figures are illustrative only, do not reflect any current market rate or specific offer, and actual quotes depend heavily on the car, term, mileage and lender.

The balloon payment: PCP's defining feature

The balloon payment, sometimes called the optional final payment or GFV, is set by the finance company at the start of the agreement based on what it expects the car to be worth at the end, taking mileage and condition into account. It is the single figure that turns PCP into a route to ownership rather than simply a lease.

PCH has no equivalent. There is no final payment, no decision to make, and nothing to negotiate at the end. You simply return the car at the agreed mileage and condition, and any risk around how much the car turns out to be worth by then sits entirely with the finance company, not you.

Mileage allowances and what happens at the end

Both PCH and PCP are sold against an agreed annual mileage, typically between 5,000 and 20,000 miles a year. Exceed that and you will pay an excess mileage charge, quoted in pence per mile, usually settled when the car is returned or valued.

On PCH the excess mileage charge is unavoidable if you have driven further than agreed, since the car always goes back. On PCP it only applies if you hand the car back or part-exchange it; choose to pay the balloon and keep the car, and mileage becomes irrelevant because you own it outright.

At the end of a PCH contract there is one outcome: the car is returned, inspected against the fair wear and tear guide, and any excess mileage or damage charges are settled. At the end of a PCP agreement there are three options: pay the balloon and keep the car, hand it back and walk away under the same wear and mileage checks as PCH, or use any equity toward a deposit on a new agreement. That flexibility is PCP's main practical advantage over PCH.

Ownership and equity

PCH never gives you ownership, under any circumstances. You are hiring the car, much like renting a flat, and the finance company retains the asset throughout. This suits anyone who likes to change cars regularly without worrying about resale values or negotiating a trade-in.

PCP keeps ownership as an option. If the car has been looked after and real-world values have not fallen as fast as the finance company predicted, there can be equity in it at the end, money that is yours to put toward whatever comes next. If values have dropped further than expected, you simply hand the car back and that loss sits with the finance company, not you.

Credit impact and affordability

Both PCH and PCP are regulated credit agreements, so applying for either involves a credit check and the agreement will show on your credit file as a financial commitment, affecting how much other lenders think you can afford to borrow.

Because PCP includes a route to ownership, it is treated by many lenders in a similar way to a loan or hire purchase agreement, and the outstanding balance can feed into affordability checks for a mortgage or other borrowing. PCH is typically treated as a rental commitment rather than a debt, though it still counts as a regular outgoing in disposable income calculations. Rules and lender practice change, so check current guidance on gov.uk if this is a deciding factor for you.

Missed payments on either type of agreement are reported to credit reference agencies and can affect your credit score. Checking affordability properly before signing, for example by using the running cost calculator to model monthly costs against insurance, fuel and servicing, is worth doing whichever route you lean toward, and more detail is covered in the leasing FAQs.

PCH vs PCP at a glance

The table below sets out the main differences side by side.

PCH tends to suit drivers who change cars every two to four years and have no interest in owning the vehicle outright. It also suits business drivers and anyone who values leasing with insurance included or a simple, fixed monthly cost without the complexity of a final payment decision.

PCP tends to suit drivers who want the option to keep the car, perhaps because they have grown attached to it or because strong residual values mean there is likely to be equity at the end. It also suits people who are not yet sure whether they want to own or return the car, since the decision can be left until the final month. Comparing a specific model, such as the Nissan Qashqai guide, against both finance types side by side is a reliable way to see which works out better for a particular budget, and for shorter commitments it is also worth considering a short-term car lease as an alternative to either.