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Car Financing - Different Contract Types

Arranging contract hire and/or purchase of a car can be a very confusing business, and not knowing all your options could be losing you money. However, the meanings of the terms used for a personal car lease are not always immediately clear.

The Main Types of Contract

The three main types of contract hire/hire purchase are Personal Contract Purchase (PCP), Personal Contract Hire (PCH) and Hire Purchase. Contract Hire and Contract Purchase are available as options to businesses and are not very different from the personal versions.

At first glance these terms may appear confusing, but they are actually quite simple in principle, and understanding what they mean could save you an awful lot of money and hassle.

Personal Contract Purchase (PCP)

Personal Contract Purchase (PCP) refers to an arrangement where you make payments against the depreciation of value in the car i.e. the value the car loses through ageing and usage on a monthly basis. You will be given an opportunity purchase the car at a pre-determined Guaranteed Future Value (GFV) at the end of the contract term. However, if you no longer need the car, you can just return it to the dealer for it to be re-sold. This contract means that you will have low monthly payments and the option of making a final balloon payment to own the car should you wish to, but with no obligation to do so. Be careful though as the car remains the property of the finance company until the end of the contract, so you will be liable for any damage.

Personal Contract Hire (PCH)

Personal Contract Hire (PCH) is a simple contract hire where purchasing at the end of the contract is not generally an option (although it may still be worth enquiring about should you wish to). It simply means that you make monthly payments to use the car for as long as the contract is valid.

Hire Purchase

Hire Purchase is a combination of a PCP and a PCH. With a Hire Purchase contract you will be committed to making monthly payments both for the use of the car and towards the eventual purchase of the car. As such, these payments will be much higher than under a PCP or PCH agreement as you are contributing to your final ownership of the vehicle.

Although these are the main forms in which car leasing contracts appear, many more variations are possible, so before you jump into anything, make sure you've done your research and talk at length with your car dealer, who should know all of the options inside out. In particular, ask whether it's possible to end your car leasing contract early, as this may come in handy if you can't keep up with the monthly payments.

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