PCP or personal contract hire: the difference

Both PCP and personal contract hire put you in a new car for a monthly payment, and both leave the car belonging to somebody else while you drive it. The difference is what happens at the end. With personal contract purchase (PCP) you can pay a final lump sum and own the car, or hand it back, or part exchange it for another one. With personal contract hire (PCH), which is what most people mean by leasing, you rent the car for an agreed period and return it. There is no option to buy it at any point¹.

That single difference shapes everything else: how the monthly payment is worked out, how much you put down at the start, what you owe if you want out early, and what you can do with the car while you have it. Under PCP you cannot sell the car privately, because it does not belong to you until the agreement is settled². Under PCH you can never sell it, because it is never your property at all¹.

The two are also treated differently by the motor finance redress scheme: hire purchase agreements such as PCP are covered, while a car leased on personal contract hire is excluded³.

PCP lets you buy the car at the end; personal contract hire never does

PCP is a hire purchase agreement in substance. Some creditors use the term personal contract purchase to describe hire purchase agreements for vehicles, and the loan is secured against the car⁷. You pay a deposit and monthly instalments, and at the end of the term you have three options: pay the balloon payment and keep the car, give it back, or part exchange it for a new one⁴. Until the last payment is made, the car is not fully yours¹⁰.

Personal contract hire is a long-term rental. You rent the car for an agreed period and return it at the end, and there is no option to buy¹. The leasing company owns the vehicle throughout and takes it back when the contract finishes¹¹. Nothing you pay during the agreement builds any ownership stake in it.

That has a practical consequence people often miss. On PCP you can end up owning an asset; on PCH you never will, whatever you pay. If owning the car at the end matters to you, PCH cannot deliver it. If it does not, and you would rather change cars every few years without a balloon payment to find, PCH is built around exactly that.

How the monthly payments are worked out on each

On PCP, the monthly payments cover interest and the cost of depreciation, the value the car loses over the term¹². Because you are only financing part of the car's value rather than the whole price, the payments are typically lower than hire purchase or a personal loan for the same car and term⁵. The payments you make cover the drop in the car's value while you are paying back the PCP².

On PCH, the rental is worked out from the value of the car, the length of the lease, the agreed mileage and how much the car is expected to lose value over the term¹⁴. It is a rental rather than a repayment of a balance, so there is no final figure to settle and no balloon payment waiting at the end.

The two look similar on a forecourt quote and behave differently underneath. A PCP payment is paying down a debt that ends with an optional lump sum. A PCH payment is paying for use of an asset you will give back. Neither is cheaper in the abstract: the monthly figure depends on the car, the term, the mileage you agree and the deposit you put in.

Upfront costs: PCP deposit or PCH initial rental

PCP normally starts with a deposit of around 10% of the car's value, followed by monthly payments⁵. Under a hire purchase agreement for a car, the deposit is usually at least 10% of the car's price¹⁵. You can also trade in your current vehicle as a deposit on a PCP agreement¹².

PCH works differently: instead of a deposit you pay an initial rental, which is usually expressed as a multiple of the monthly payment, such as three or six months up front. Any initial rental figure is specific to that deal, so compare the total up-front amount rather than the multiple alone.

A larger upfront payment lowers the monthly figure on both, but it does different things. On PCP it reduces the amount you are financing. On PCH it simply buys down the rental. Either way, money paid up front is money you will not see again if the car is written off or the agreement ends early, so it is worth thinking about how much of your own cash you want tied up in a car you will not own.

The end of the agreement: buy, swap or hand back under PCP

At the end of a PCP you have three routes. You can pay the balloon payment and keep the car, give it back, or part exchange it for a new car⁴. If you hand it back, there will be nothing more to pay provided you have honoured the terms of the agreement and the car is not damaged¹⁶. If you have gone over the mileage limit or damaged the car, there will be something to pay².

The balloon payment is the figure you agreed at the start. It is based on the minimum guaranteed future value of the car, meaning how much the dealer expects it to be worth when the deal ends, and it is also called the guaranteed minimum future value¹⁷. It is set at the outset based on the car type and how many miles you said you would drive².

At the end of a personal contract hire, there is only one route: you return the car to the leasing company¹¹. There is no balloon payment to consider and no option to keep it. What you may owe on return depends on mileage and condition, not on a purchase figure.

Mileage limits and fair wear and tear charges

Both products set an annual mileage limit at the start, and both charge you if you exceed it. On PCP you agree an annual mileage limit when you take out the contract, and the lower you set it, the lower your monthly payment⁶. If you go over the agreed limit, you pay an excess mileage charge when you return the car¹⁰. There are also fees for damaging the car¹⁸.

On a lease, you will be charged for exceeding agreed mileage limits or incurring damage¹⁹. Return conditions on a PCP are typically subject to being within BVRLA wear and tear guidelines, and if there is any excess mileage, charges apply¹².

The mileage figure is one of the easiest things to get wrong, because it is set years before you hand the car back. Setting it low keeps the monthly payment down and stores up a bill for later. Setting it high costs more each month but removes the risk. The same logic applies to condition: fair wear and tear is allowed, damage beyond that is charged.

Ending early: voluntary termination on PCP, remaining rentals on PCH

This is where the two products diverge most sharply, and where the Consumer Credit Act matters.

On PCP, the provisions of the Consumer Credit Act give you the statutory right to terminate the agreement at any time, which is called voluntary termination¹. The Consumer Credit Act 1974 gives you the right to end it at any time before the final payment is due and hand the car back⁶. You normally need to have paid at least half of the total amount payable, so if you have paid less you will need to make up the difference, and you must have taken reasonable care of the car⁶. In a PCP agreement, the guaranteed future value, often called the balloon payment, has to be included in the total amount payable when working out whether you have reached the 50% mark¹. You cannot voluntarily terminate if your lender has already defaulted the account¹.

On personal contract hire, there is no equivalent statutory right. It is not generally possible to terminate a PCH agreement early, and if you do, you may need to pay the full amount remaining on the lease¹. Lease customers who end a lease early face termination charges¹¹.

There is one exception worth knowing about. No further rental payments or costs are applied to customers whose leases end early as a result of a DLA to PIP, DLA to ADP or CDP to ADP reassessment²¹.

If you simply want to settle a PCP early rather than terminate it, you can request a settlement quote, and how far into the agreement you are affects the amount left to pay¹². There is a separate page on voluntary termination versus early settlement if you are weighing the two.

PCP or leasing: which fits how you drive

The two products suit different habits, and the deciding factors are usually mileage, whether you want to own the car, and how much you value being able to get out.

PCP tends to fit drivers who want the option of keeping the car, who are comfortable with a balloon payment at the end, and who want the flexibility to hand the car back or trade it in. It also suits anyone who wants the statutory protection of voluntary termination, which leasing does not offer. If you are unsure what you will want in three years, PCP keeps the door open.

PCH tends to fit drivers who know they will change cars at the end of the term, who do not want to own a depreciating asset, and who are confident about their annual mileage. It also suits drivers who want a fixed rental and no balloon payment to plan for. The trade-off is that you are locked in: leaving early is expensive.

Mileage is the single biggest practical difference in day-to-day use. Both products charge for exceeding the agreed limit, so an honest estimate matters more than an optimistic one. If your mileage varies a lot from year to year, a product with a fixed annual allowance and an excess charge at the end carries real risk.

There is also a route for disabled drivers worth knowing about. The Motability Scheme lets you lease a car, mobility scooter or powered wheelchair using the mobility component of your Disability Living Allowance or Personal Independence Payment²². If you qualify for the enhanced rate of the mobility component and lease a vehicle or mobility scooter through the scheme, some or all of the mobility payment is paid directly to Motability²³.

Missed payments, repossession and where to get help

Both products are secured against the car, which is the most important thing to understand about the risk. With hire purchase and PCP deals the loan is secured against the car, so if you fail to keep up with repayments you could lose the vehicle¹⁴. On a lease or hire agreement, the finance company can take the car back if you miss payments².

The rules on repossession differ depending on how much you have paid. If you have paid less than a third of the amount owed under a hire purchase agreement, and the goods are not kept in your home or on private land, the creditor may be able to repossess without a court order²⁴. If you have paid more than a third, or the goods are stored on private land or inside your home, a court order is needed²⁴. On a PCP specifically, the creditor may be able to repossess the vehicle without getting a court order first, because less than a third of the total amount payable may have been paid before the end of the agreement¹⁶.

You normally need to miss two or three payments before a default notice is issued²⁰. If the car is sold and does not raise enough to clear the remaining debt, you will still owe the money²⁴.

This is different from an unsecured personal loan, where the loan provider cannot take the car back if you miss payments². That distinction is the main reason to think carefully before choosing a secured product.

If you are struggling, free and impartial help is available. StepChange and National Debtline both advise on car finance debt, and the Financial Ombudsman Service can look at complaints about how a lender treated you. If you are self-employed, there is dedicated debt advice for that situation too²⁵. If you have already missed payments, the page on what happens if you can't pay your car finance sets out the process, and car finance repossession covers what a lender can and cannot do.