Few purchases depreciate at the speed of a new car. As the theory goes, the car loses value as soon as you drive it off the dealer's forecourt. However, there are ways to eliminate the negative effects of depreciation - and personal contract hire is top of the list. Personal contract hire is both cost-effective and easy to manage. This guide to personal contract hire will explain how it works and who it's right for.
Personal contract hire personal leasing is essentially the same as regular contract hire, but it applies exclusively to private individuals. It is the most common form of car leasing and usually when the term ‘car leasing' is referred to, most people are talking about personal contract hire.
With a personal contract hire agreement you take control of a car for a contractual period - usually referred to as the ‘lease period'. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments to a leasing company for the duration of the contract - and when the contract expires you simply return the car to the leasing company or take out a new personal contract hire lease. As a result you never have to worry about resale values of the car - because you can simply return it and walk away.
It's important to understand how your payments are determined.
The personal contract hire company will work out the ‘residual value' of the vehicle - that is its value at the end of the contractual period once depreciation is taken into account. To estimate this value, the company will ask you to stick to a strict mileage limit while you drive the car - exceeding this limit could see you penalised at the end of the term.
To determine your payments, the company will deduct the estimated future value (residual value) from the retail price of the car - and you pay the difference in monthly instalments.
There are many advantages to personal contract hire including:
There are disadvantages to personal contract hire too, but generally these are bases on perception:
If you run a business, you should investigate regular contract hire as this will include VAT built into monthly payments and additional incentives such as hire rental tax allowances.
However, for private individuals, personal contract hire can be ideal dependent on your circumstances - just think about how you plan to use the vehicle.
If you travel a lot and your mileage is high, the residual value of the car will drop which will increase your monthly payments. However, personal contract hire gives you fixed monthly payments and you have the option to drive a new car every few years, which is an excellent incentive. So as long as you don't mind not taking ownership of a vehicle, personal contract hire could be the right solution for you.
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