The fastest-growing sector of the motor finance market could have far-reaching consequences for how customers view their cars. Chris Farnell looks at the inexorable rise of personal contract hire (PCH).

Owning things is becoming a distinctly 20th century concept. More and more people are renting their accommodation without any thought of eventually owning a property. You have a Netflix subscription instead of a Blu-Ray collection, a Spotify account instead of a record collection, and your phone is leased to you as part of a contract instead of something you buy outright.

Consumers these days, perhaps understandably, are reluctant to pay a large up-front sum to buy something outright when they can lease it for a manageable monthly amount. So maybe it is not surprising that this outlook has spread to the car finance sector.

“An increasing percentage of people are looking at assets as a monthly cost,” explains Adrian Dally, head of motor finance for the Finance and Leasing Association (FLA). “PCH is a further evolution of that. With PCP [personal contract purchase] you have the option to purchase at the end; with PCH it’s a straight hire, and culturally a greater number of people now are comfortable with that. That’s their need: they’re only going to keep it for two years, they’re confident they can pay for it, so it’s the most appropriate product.”

It is a trend that is gathering steam, and the sector has seen impressive levels of growth in recent times.“The latest statistics from the FLA show that PCH is the fastest-growing funding option in the consumer new car market,” agrees Paul Harrison, head of strategic partnerships at “In terms of market share, it’s now second behind PCP, having overtaken HP. We’ve seen this upward trend mirrored in our own data, with a 44% increase in email enquiries sent via our online leasing marketplace in the first half of this year.”

David Kendrick, a partner at UHY Hacker Young Manchester, has also observed the
changing relationship that consumers have with car ownership. “I think car purchase is moving towards a mobile phone-type arrangement,” he points out. “You look at Auto Trader now, it used to be about showing car prices; now it shows a monthly payment option. People are more interested in what it’s going to cost on a monthly basis, not whether it’s a £10,000 car or a £100,000 car.”

PCH has always been one of the four main car finance products, alongside HP and personal loans. Traditionally the sector has focused on PCP, the largest of these four sectors, with HP running in second place. “The unwritten story is that over the last four years PCP hasn’t been the fastest-growing sector, it’s PCH – admittedly from a much lower starting point,” Dally says.


Of course, PCH has its roots in business contract hire, which has a long and established history in the fleet sector. “What is changing is the rate of uptake within the retail sector, and the number of dealers that are now offering PCH to meet increased consumer demand,” Harrison notes.

PCH is proving attractive to these new customers because it benefits from some very appealing terms and rates. “The BMW group has an agreement on the 520 M-sport on a PCH deal for zero deposit, £199 a month plus VAT,” Kendrick says. “That costs the end user £240 a month for a two-year deal; you’d never be able to finance a £50,000 car that way.” These rates are possible partly as a response to pressures on the dealer network themselves.

As Kendrick points out, they are “a response to the increased volumes that manufacturers have put on the dealer network”. He adds: “The UK has quite a strong economy compared to other markets, so from a manufacturing point of view they see the UK as a good home for business. “If you look at the Spanish economy and others out there, the UK has always been pretty stable. The UK then has an obligation to shift that metal and get those vehicles on the road, which led to the PCH and increased focus on affordability for the end user.”

The challenge, Kendrick believes, is in keeping the public educated about the kinds of deals available and what the terms mean for the end user. “One unknown is whether they realise what they’re signing up to, or if they are just looking at the attractiveness of the monthly payment,” Kendrick explains.

“That’s probably a change in buying behaviour that’s seen quite a significant shift.” Harrison agrees, explaining: “Within the industry, the perception of contract hire as a product for business users only needs to be addressed. The choice of offers and availability of cars from a variety of sources can be overwhelming for those consumers who are new to leasing.”

As is often the case with the modern credit and finance products industries, transparency needs to be the priority moving forward. “The attention the industry gives to different motor finance products is often determined by the incentives that are available. Transparency of all the different products is vitally important for consumers when choosing their next car,” Harrison says.

“The findings of the FCA’s motor finance review, including on commission arrangements, are expected at the end of the year. Consistently presented offers, including the availability of stock and the cost-of-vehicle options, will help consumers more easily compare online offerings.”

Dally agrees, saying: “The regulatory obligation is to enable the consumer to make the choice about the right product for them. For instance, you don’t have early termination rights with PCH. “So, for PCH I’m going to use this car for 18 months or two years, and I’m confident in my finances and job stability; I don’t need those early termination rights because I’ll be fine. But if you’re less sure about whether you’ll keep the same job and income, those rights can be important. The challenge is ensuring customers have the right information.”

While PCH has done well out of the stability of the UK market, recent events have made that status appear less certain from an international perspective. Kendrick admits: “Because of the weak pound and the Brexit scenario, it’s possible we are going to see fewer vehicles coming to the UK. If that happens, manufacturers may be looking to divert vehicles to other markets. You can see how that might have an impact on PCH, because the vehicle supply will be lower so prices will increase.”

Kendrick reports seeing an average 50% increase in cost for the 10 most popular PCH vehicles over the last 18-24 months. For users coming to the ends of their contracts, used to being able to lease premium cars for under £200, this could be a rude wake-up call. There are risks for the lenders as well, as residual values can drop. Dally believes the key to making the most of these opportunities is good data – a resource that is becoming ever more readily available.

“It’s like weather forecasting: it has gotten more reliable as the data has gotten better,” Dally explains. “We have many more data points than there ever were, more analytics, so you can have the confidence in your residual value. Your confidence is higher than it was five or 10 years ago, and we’ve a great degree of confidence in the risks to you as a lender. It makes the product more viable.”

As the quality of data improves and PCH continues to be the fastest-growing sector of car finance, people across the industry are going to be looking for new opportunities in this area. “For those who are embracing it, it’s a good mechanism to shift volume against a manufacturer target, and replaces the risk of pre-registering vehicles,” Kendrick says.

Harrison also highlights “the potential for growth, and for personal leasing to become a mainstream product on the scale of PCP”. He adds: “It is estimated that 80% of PCP consumers hand their car back at the end of their term, rather than pay the balloon payment, which means those consumers essentially lease or rent their vehicles. “PCP is not a new product – it was around in the 1990s – but it has been incredibly successful in shifting consumer behaviour from owning to using.”

Indeed, Harrison believes that PCH could end up changing the fundamental nature of the car finance industry. “Many of the emerging subscription services are leasing by another name, but they provide shorter-term hire agreements and that increased flexibility will meet consumer expectations for any car, anywhere,” he says. “The industry is shifting to become mobility providers rather than asset funders.”