Personal Contract Hire (Referred to as Leasing)
Personal contract hire is a type of lease for personal customers. It consists of an upfront payment followed by regular monthly payments over a fixed period of time. It is usually cheaper than financing a vehicle outright as you are effectively renting the vehicle, it doesn’t belong to you. The agreement is based on a fixed term and mileage. Charges will occur if you exceed the mileage stated on your contract so it is important to take a contract based on a mileage that will best suit your personal needs.
The vehicle belongs to the finance company so at the end of your contract you hand the vehicle back to them. This type of contract is usually preferred by people who like to change their vehicle every few years.
Examples of mileage excess average around 4-6p a mile for small cars 6-9p for medium sized to 10-16p for large executive cars, Road tax manufactures warranty and breakdown cover are included for the period of the agreement (providing the manufactures warranty has not expired).
Business Contract hire ( Referred to as Business leasing)
Contract hire can be a cost effective rate for businesses wishing to run new cars. The monthly rentals are fixed for the term of the contract and include Road Fund License (RFL). For VAT registered companies, a portion of the VAT may be reclaimed.
The vehicle is handed back at the end of the contract, excess mileage charges will apply if the contract mileage is exceeded average examples 4-6p a mile for small cars 6-9p for medium sized to 10-16p for large executive cars.
HIRE PURCHASE – HP
Hire Purchase (HP) is the traditional way to finance a car purchase. You pay off the entire price of the vehicle through a series of monthly payments. At the end of the contract period the vehicle becomes your property.
The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.
HP is very similar to borrowing a sum of money from a bank and paying it back over a fixed period of time, with interest. Hire purchase is a type of secured loan which are often preferred over alternative (unsecured) loans because they allow a greater borrowing limit. The term “secured loan” means exactly that, a loan that the lender can secure against an asset (in this case, a car).
Personal Contract Purchase- PCP
Using a Personal Contract Purchase (PCP) plan the customer will make an initial payment, followed by a series of monthly payments and a final large, but optional payment, called a GFV.
A PCP plan will enable the customer to purchase a vehicle normally up to 3 years old with lower monthly repayments by deferring a large amount of the total cost of the vehicle to the end of the contract – this amount is known as the Guaranteed Future Value (GFV), often referred to as the optional final balloon payment. The GFV is set by the finance company and is based on the chosen vehicle and the annual mileage stipulated by the customer. The annual mileage can be set between 6k and 30k per annum and will affect the figure given for the GFV.
“With PCP your monthly payments cover the loss in value of the car over time – you’re basically paying the monthly depreciation of the car plus the interest on the outstanding balance. At the end of the contract you have the option to buy the car at a previously set price”.
HOW ARE THE MONTHLY PAYMENTS CALCULATED?
The Guaranteed Future Value plus the customer’s deposit is subtracted from the cash price of the vehicle and the monthly payments are based on the balance (plus interest on the balance and the GFV). At the end of the agreement the customer will have a choice of making a final lump sum payment in order to complete the agreement, or to simply return the car to the finance company without any further obligation.
By only repaying the difference between the cash price and the optional balloon payment you are only financing the depreciation of the car.
WHAT DO I DO AT THE END OF THE CONTRACT?
At the end of the contract you have four options:
Return the vehicle to the finance company. As long as you have not exceeded the agreed mileage, you will have nothing more to pay.
- Keep the vehicle by paying off or refinance the outstanding balloon payment or GFV.
- Trade-in your car for a new car.
- You can come back to Alliance and part exchange your vehicle for the next new vehicle. If the trade-in value is greater than the GFV, the difference can be used towards a deposit on the next agreement.
- Sell the vehicle privately and keep any profit over and above the GFV.
LEASE PURCHASE – LP
HOW DOES IT WORK?
Lease Purchase is structured in the same way as a Personal Contract Purchase(PCP) in that a capital lump sum amount, known in this instance as the Residual Value (RV), is deferred to the end of the agreement and this must be settled to gain outright ownership.
As with PCP, the RV is based on the type of vehicle and the suggested annual mileage covered by the vehicle. By deferring a lump sum to the end of the agreement, the RV reduces the regular monthly payments and makes more expensive vehicles far more affordable.
As a customer you will benefit from a slightly lower finance rate with a Lease Purchase product as, unlike PCP, there is no guarantee offered at the end of the agreement in terms of handing the vehicle back to the finance company. In other words, unlike PCP, Lease Purchase offers no option to walk away from the vehicle at the end of the contract.
It is your responsibility then to settle the final RV (or balloon payment) either though additional finance, cash or settlement by part-exchange.
“Put simply, Lease Purchase has a lower monthly payment than PCP, but you have to purchase the car at the end of the lease term”
Lease Purchase repayment periods are typically taken over 2, 3 or 4 years and settlement can be made at any stage of the agreement. Deposits for Lease Purchase are normally a minimum of around 10% and a maximum of 50% of the total vehicle price. Because the funder is exposed to less risk, customers will normally benefit from a slightly lower interest rate and there will be no fixed mileage contract.