Personal contract hire (car leasing) explained

Personal contract hire, or PCH, is a way of running a car without ever buying it. It is essentially a lease: you rent the car for an agreed period and return it at the end, and there is no option to buy¹. The car remains the property of the finance company throughout, and you will never be allowed to sell it². That single fact shapes everything else about the product: what you pay, what happens at the end, and what rights you have if things go wrong.

The payments are a fixed monthly rental, usually after an initial rental paid upfront. Because you are renting rather than buying, you do not build up any ownership or equity in the car, and at the end of the lease you simply hand it back¹. This makes PCH quite different from hire purchase and personal contract purchase, where ownership or the option to own is built into the deal.

Personal contract hire is a lease: you never own the car

A personal contract hire agreement is a rental agreement for a car. You rent the car for an agreed period and return it at the end, and there is no option to buy¹. When you lease or hire a car, it remains the property of the finance company², and if you have a car or other item on a lease or rental agreement, you do not legally own the item⁴.

This has practical consequences beyond the paperwork. Because PCH cars are never your property, you will need to return them at the end of your hire agreement, and you will never be allowed to sell the car¹. The same restriction applies across hire purchase, conditional sale, lease and hire agreements: you cannot sell the car without the permission of the finance company². That contrasts with buying a car with a personal loan, where the loan provider cannot take the car back if you miss payments and you can sell the car at any time².

It also means the car is not an asset you can use to clear debts. Guidance for people in financial difficulty notes that items on hire-purchase, conditional sale, lease or rental agreements cannot simply be sold, because you do not legally own them⁴. If you are struggling with debt, a leased car is treated differently from a car you own outright, and free debt advice can take that into account.

PCH, PCP and hire purchase: how each one ends

The three main ways of financing a car from a dealer differ most sharply at the end. With PCH there is no option to buy: the car goes back¹. With personal contract purchase, you might pay an initial deposit and make monthly payments much like hire purchase, but these are typically lower because you are only financing part of the car's value; at the end of the term you can either return the car, pay a final payment to keep it, or trade it in¹. With hire purchase, the finance company owns the car until you have made the last payment², and at the end of the contract you pay a nominal fee, usually £100 to £500, at which point you become the owner of the car⁵.

The end-of-agreement rules also differ when things go wrong or you want out early. On hire purchase you can return the car to end the agreement, though you will not get any payments you have made back, and if you have paid more than half of the agreement, nothing more is owed². That right belongs to hire purchase, not to PCH. On PCP, if you choose to end the agreement early yourself, you normally have to pay 50% of the total amount payable⁶. On PCH, early termination is not generally possible at all, and if you do terminate you may need to pay the full amount remaining on the lease¹. The dedicated comparison of PCP and personal contract hire sets these differences out side by side.

What you pay: upfront and fixed monthly payments

A personal contract hire deal is built around an initial rental, paid at the start, followed by fixed monthly rentals for the rest of the term. The monthly payments are fixed for the lease, which is one of the product's attractions: the cost of the car itself is known in advance, and the leasing company takes the risk of what the car is worth when it comes back.

The size of the upfront payment varies between deals, and some leases are advertised with little or nothing upfront. There is no general rule that a smaller initial rental makes the lease cheaper overall; it changes how the cost is spread rather than what the car costs in total. For comparison, under a hire purchase agreement for a car you usually pay an initial deposit, normally at least 10% of the car's price⁷, and the same principle applies: a smaller deposit means larger monthly payments, not a cheaper car.

Because the payments are rentals rather than repayments of a loan, there is no settlement figure in the sense there is with hire purchase, and no final payment to make at the end. What can add to the cost instead are charges at the end of the lease, discussed below, and the cost of anything not included in the monthly rental, such as insurance and fuel. Guidance on budgeting for a vehicle lists road tax, insurance, repairs, services and fuel as the running costs to plan for alongside any finance payments⁸.

How the car's value, the term and mileage shape the monthly price

The monthly rental on a lease is worked out from what the car is expected to lose in value over the term, plus the leasing company's costs. The clearest illustration of the principle comes from how PCP payments are calculated, because PCP finances the same thing: the drop in the car's value rather than the whole car. StepChange gives a worked example: a car is worth £20,000, the dealership works out it will be worth £15,000 after three years, and the agreement lasts three years, so you pay £5,000 over three years, with interest on top². A PCH lease is priced on the same fall in value, but the whole of it is spread across the rentals and there is no final payment or option to buy at the end.

Mileage matters because it is one of the main drivers of how much a car depreciates. A lease is agreed with an annual mileage allowance, and the leasing company expects the car back with roughly the miles it priced the deal around. Going over the allowance means the car is worth less than expected when it returns, which is why excess mileage charges exist. The term matters in the same way: the longer the lease, the more value the car loses over it, though how the rentals are spread also changes with the length of the agreement.

The term also affects what happens at the end. A PCP agreement is normally over three years², and a lease agreed around a similar period works in much the same way from a budgeting point of view: a known monthly cost for a fixed period, then a decision about what to do next. With PCH that decision is made for you, because the car goes back.

What is included: road tax, insurance, breakdown cover and maintenance

What a lease includes depends entirely on the scheme and the deal. Some lease schemes bundle most of the running costs into the monthly payment; others include very little beyond the car itself, with maintenance available as an optional extra.

The clearest examples of what can be included come from lease schemes for disabled people. On the Motability Scheme, insurance, breakdown cover, servicing and maintenance are all included in the price⁹, and the scheme's leases also include tyre and windscreen replacement¹⁰. Disability Rights UK describes the same package: as part of a contract hire lease, insurance cover and free replacement tyres and windscreens are provided when needed¹¹. Family Fund's mobility support, which leases cars to families with disabled children, lists the inclusions as vehicle road tax, car insurance, servicing, repairs and maintenance, breakdown cover and running costs¹².

Mainstream personal contract hire deals generally include the car and its road tax, with maintenance packages available at extra cost, but the exact contents vary deal by deal, so the lease agreement itself is the place to check. What is almost never included on a mainstream lease is insurance: the Motability Scheme is unusual in bundling it in⁹. Before signing, it is worth listing everything you will still need to pay for separately and adding it to the monthly rental to see the true cost of running the car.

Terms of two to five years, often on new cars

Personal contract hire agreements typically run for a few years, with three years the most common length in the car finance market. A PCP agreement is normally over three years², and the Motability Scheme's contract hire lease agreements offer a new car of your choice every three years, or five years for wheelchair accessible vehicles¹⁰. A case study from the Financial Ombudsman Service, involving a customer who told the ombudsman he was struggling to repay a car finance agreement, describes a new car finance agreement costing £245 each month over three years¹⁴, which is typical of the terms people take on.

Because the lease is priced around the car's expected fall in value, PCH is mostly arranged on new cars, where the leasing company can predict that fall with more confidence. The Motability Scheme is explicit about this: its contract hire agreements offer a new car every three years¹⁰. Leasing a used car is less common, though hire purchase and PCP are regularly used for used cars⁵.

The length of the term is fixed when you sign. 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, so the term chosen at the outset is the term you are committed to. Choosing a longer term lowers the monthly rental but commits you for longer, and the car will be older and worth less when it goes back.

Arranging a lease through a dealer, broker or scheme

A personal contract hire lease is normally arranged through a dealer or a leasing broker, but the finance itself comes from elsewhere. The finance is normally from a company separate to the garage or dealership². That means the firm you deal with when choosing the car is often not the firm you owe money to for the rest of the term, and it is the leasing company's name that will appear on the agreement and on your bank statements.

Some leases are arranged through dedicated schemes rather than the open market. The Motability Scheme lets people lease a car, mobility scooter or powered wheelchair using the mobility component of their Disability Living Allowance (DLA) or Personal Independence Payment (PIP)¹⁵. The scheme is open to people receiving qualifying disability benefits¹⁶, and to recipients of the Armed Forces Compensation Scheme¹⁷. Family Fund arranges credit hire agreements, regulated hire agreements, for the lease of a car as part of its mobility support¹².

Leasing companies and brokers will check your credit history before agreeing a lease, because they are handing over a car worth many thousands of pounds on the strength of your promise to keep paying. How lenders check what you can afford, and what they must look at, is covered in the guide to loan affordability checks, and what a poor credit history means for borrowing is covered in getting a loan with a poor credit history. If a lease is refused, the guide to why car finance applications are declined explains the common reasons.

Handing the car back at the end of the lease

At the end of a personal contract hire lease, the car goes back to the leasing company. There is no final payment, no option to buy and nothing to negotiate about ownership: the car is returned at the end of the agreement¹. What can still cost money at that point are end-of-lease charges, and the two to watch are excess mileage and damage beyond fair wear and tear.

The mileage allowance is agreed at the outset, and the lease is priced on the car coming back with roughly that mileage. Exceeding the allowance reduces what the car is worth to the leasing company, and excess mileage charges are how that difference is recovered. The condition standard works the same way: the leasing company sets out what counts as acceptable condition for a car of that age and mileage, and damage beyond that standard can be charged for. Because the standards belong to the leasing company, the lease agreement is the document to check before the collection date.

This is where PCH differs most from hire purchase at the end of the agreement. On hire purchase you can return the car to end the agreement, with no payments made returned, and if you have paid more than half of the agreement, nothing more is owed². On PCH, returning the car is simply what the agreement says will happen, and the questions at the end are about mileage and condition, not about ownership. The guide to charges when you return a car at the end of PCP covers the equivalent end-of-agreement charges on that product.

Ending a lease early usually means paying the remaining rentals

Personal contract hire is one of the least flexible forms of car finance when it comes to getting out early. 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. That is a harder position than the equivalent rights on hire purchase and PCP. On PCP, if you choose to end the agreement early yourself, you normally have to pay 50% of the total amount payable⁶. On hire purchase, you can return the car and, if you have paid more than half of the agreement, nothing more is owed².

Some schemes make specific provision for leases that end early through no fault of the customer. On the Motability Scheme, no further rental payments or costs will be applied to customers whose leases end early as a result of a DLA to PIP, DLA to ADP or CDP to ADP reassessment¹⁸. Where an Advance Payment was made, it is refunded on a pro-rata basis: for example, if the agreement ended after one year of a three-year lease, two-thirds of the Advance Payment would be refunded¹⁸. These provisions belong to that scheme and are a reminder that the early-termination terms are set by the agreement you sign.

Payments already made are not returned when a car finance agreement ends early. StepChange is explicit that if you end a hire purchase agreement, you will not get back any of the payments you already made¹⁹, and the same logic applies to a lease: the rentals have paid for the use of the car so far. Before signing any lease, it is worth knowing what the agreement says about early termination, because that is the clause that matters if your circumstances change. The comparison of voluntary termination and early settlement covers the rights that exist on other products.

Missed payments, repossession and your credit record

Missed payments on a personal contract hire lease have consequences on two fronts. First, the car can be taken away: when you lease or hire a car, the finance company can take the car back if you miss payments². This is the flip side of never owning the car. With a personal loan, by contrast, the loan provider cannot take the car back if you miss payments², because the loan is not secured on the car.

Second, your credit record is affected. A credit file includes personal details, what you owe, defaults, court action such as County Court judgments, decrees or money judgements, home repossession, debts secured against an old address and insolvencies²⁰. Missed payments could affect your credit rating, making it more difficult to get credit in the future²¹. How borrowing is recorded is covered in the guide to how loans affect your credit file.

The process usually gives some warning before the car is taken. On hire purchase and conditional sale agreements, you normally need to miss two or three payments before a default notice is issued³, and a default notice is usually issued after three months¹⁹. The finance company will normally be in contact during that period, and the worst course is silence: the Financial Ombudsman Service has published a case study of a customer who told the ombudsman he was struggling to repay his car finance agreement, which shows the kind of complaint the ombudsman can look at when a lender has not dealt fairly with a customer in difficulty¹⁴. The guide to what happens if you can't pay your car finance and the guide to car finance repossession set out the process and your options in more detail.

Where to get help if payments become a struggle

Free, independent debt advice is available and is the right starting point if lease payments have become unaffordable. StepChange Debt Charity provides free debt advice and covers car finance debt in its guidance², including what to do about buying a car when you are on a debt management plan¹³. National Debtline provides free advice and has a dedicated guide to car repossession, what happens and what you can do about it³. Business Debtline, which advises people who are self-employed as well as businesses, covers hire purchase debt and the treatment of leased assets²², and its guidance on selling assets to clear debt explains why a leased car cannot simply be sold⁴.

If the problem is with how the finance company has behaved rather than with the debt itself, the Financial Ombudsman Service can look at complaints about car finance, and its published case studies show the sort of situations it deals with¹⁴. The guide to complaining about a lender or finance company explains the process, and the wider guide to what to do if you can't repay a loan covers the options in one place.