When it comes to financing an electric vehicle (EV), many buyers are unsure whether to choose Contract Hire (CH) or a Personal Contract Purchase (PCP). While both methods offer financial flexibility, the best choice depends largely on whether the EV is new or used. In the UK, Contract Hire is a popular option for financing new EVs, while Personal Contract Purchase is the go-to choice for used EVs due to the limited availability of leasing options for pre-owned vehicles. Here’s why.

The Benefits of Contract Hire for New EVs

Contract Hire (also known as leasing) is a long-term rental agreement where you pay a fixed monthly fee to use an EV for an agreed period, usually 2 to 4 years. At the end of the term, you simply return the EV, avoiding concerns over depreciation or resale value.

Why It’s Ideal for New EVs:

• Lower Monthly Payments – Since you’re only paying for the EV’s depreciation, rather than its full value, monthly payments are often lower compared to other financing options.

• Depreciation Protection – New EVs lose value quickly, often up to 50% in the first three years, but with CH, this isn’t your concern. The leasing company bears the risk of depreciation.

• Hassle-Free Ownership – Road tax is usually included, and many lease agreements offer maintenance packages, reducing unexpected costs.

• Regular Upgrades – Since you return the EV at the end of the term, you can switch to a new model every few years without worrying about selling or trading in. This is especially beneficial for EVs, as technology (e.g., battery range, charging speed) improves rapidly.

• No Balloon Payment – Unlike PCP, there’s no final lump sum to pay if you want to keep the vehicle.

• Protection Against Market Uncertainty – With fluctuating used EV values and economic uncertainty, leasing ensures fixed costs without worrying about the resale market.

• UK Road Tax Included – CH agreements typically include UK road tax for the duration of the lease, whereas with PCP, you are responsible for paying road tax separately.

• Tax Benefits for Business Users – For company car drivers, CH agreements on EVs qualify for favorable Benefit-in-Kind (BiK) tax rates (as low as 2% for EVs in the UK), making them a cost-effective option.

Potential Downsides of Contract Hire:

• No Ownership Option – At the end of the term, you must return the EV, with no option to buy it, which may not suit those who want long-term ownership.

• Mileage Limits – CH agreements come with strict mileage caps (e.g., 10,000 or 15,000 miles per year). Exceeding these limits incurs costly penalties.

• Early Termination Fees – Ending a CH agreement early can be expensive, often requiring you to pay a significant portion of the remaining lease payments.

Why PCP is the Best Choice for Used EVs

A Personal Contract Purchase (PCP) is the most popular financing option for used EVs in the UK, as Contract Hire is generally not available for pre-owned vehicles. With PCP, you pay an initial deposit followed by monthly payments that cover part of the EV’s cost. At the end of the term, you can either:

• Return the EV with no further obligations (subject to mileage and condition).

• Pay a pre-agreed balloon payment (the Guaranteed Minimum Future Value, or GMFV) to own the EV.

• Trade it in for another vehicle.

Why PCP Works Best for Used EVs:

• Lower Depreciation Impact – Used EVs have already gone through the steepest depreciation phase, so the balloon payment is typically more reasonable if you decide to buy the vehicle.

• More Affordable Ownership Option – If you want the option to own the EV, PCP gives you flexibility, unlike leasing options that aren’t available for used vehicles.

• Wider Availability – PCP is widely offered on used EVs, making it the default financing choice for pre-owned electric cars.

• Lower Upfront Costs – PCP often requires a lower initial payment compared to other financing options, making it more accessible for those with limited immediate funds.

• Flexibility at End of Term – PCP lets you decide whether to keep, return, or upgrade, offering adaptability to changing needs or budgets.

• Better Adaptability in Changing Financial Situations – If your financial circumstances change, PCP gives you the option to return the EV or refinance the balloon payment rather than being locked into ownership.

• Sustainability Benefits – Choosing a used EV via PCP extends the life of an existing electric vehicle, reducing the demand for new vehicle production and supporting environmental goals.

Potential Downsides of PCP:

• Higher Overall Costs – If you choose to pay the balloon payment to own the EV, the total cost of PCP can be significantly higher than other financing options.

• Risk of Negative Equity – If the EV’s market value falls below the GMFV, you could end up owing more than the EV is worth if you decide to sell or trade it in. This risk is higher for EVs due to rapid technological advancements affecting resale values.

• Ongoing Responsibilities – PCP typically doesn’t include road tax or maintenance, meaning you’re responsible for these additional costs.

Cost Comparison: Contract Hire vs. PCP for New EVs

To illustrate the cost differences between CH and PCP, let’s look at an example of a new Tesla Model 3 Long Range. The figures are sourced directly from the Tesla UK website as of late 2023, ensuring accuracy. Assumptions include a 36-month term, a £2,400 downpayment, and 15,000 miles per annum. Note that maintenance packages are not included in these quotes unless stated otherwise, and interest rates for PCP may vary (Tesla offers 0% APR, but most other manufacturers charge interest, typically 5-7% APR).

Example 1: New Tesla Model 3 Long Range (Electric Vehicle)

Monthly Payment Comparison (Source: Tesla UK Website):

• Contract Hire (CH): £528 per month

• Personal Contract Purchase (PCP): £898 per month

• Difference: £370 per month cheaper with CH

Total Cost Over 36 Months:

• CH Total Cost: (£528 × 36) + £2,400 = £21,408

• PCP Total Cost (excluding final balloon payment): (£898 × 36) + £2,400 = £34,728

• Difference: PCP is £13,320 more expensive over the 36-month term

Balloon Payment (PCP Only):
The GMFV (balloon payment) to own the Tesla Model 3 at the end of the term, as per Tesla’s website, is approximately £25,000, meaning the total cost of ownership via PCP would be £34,728 + £25,000 = £59,728, compared to the EV’s original list price of around £50,000. This highlights the premium cost of ownership via PCP, even with 0% APR.

Key Takeaways:

• CH offers a significantly lower monthly payment, making it more affordable for those who don’t need to own the EV.

• Over the full 3 years, PCP costs over £13,000 more, even before considering the final balloon payment required to own the vehicle.

• CH is ideal for those who want fixed costs and a hassle-free experience, while PCP suits those who may want to own the EV later—but at a premium.

• For new EVs like the Tesla Model 3, CH is particularly attractive due to rapid advancements in EV technology, allowing you to upgrade to newer models with better range or features.

Financing Options for Used EVs

For used EVs in the UK, Personal Contract Purchase (PCP) is the most common financing option, as Contract Hire is generally not available for pre-owned vehicles. To illustrate how PCP works for used EVs, let’s consider a used Polestar 2, a premium electric fastback with a strong presence in the used market. Polestar’s Pre-owned programme offers certified used vehicles with specific PCP deals, making it an excellent example. The figures below are based on typical market rates for a 3-year-old Polestar 2 Long Range Single Motor with average mileage, and reflect a promotional offer from Polestar UK (valid for orders placed between 01.01.2025 and 31.03.2025, subject to availability, with an 8.9% APR representative, reduced from 11.4%). Assumptions include a 36-month term, a £3,000 downpayment, and 10,000 miles per annum. Note that maintenance packages are not included in these quotes, and buyers are responsible for road tax and insurance.

Example: Used Polestar 2 Long Range Single Motor (3 Years Old, Electric Vehicle)

PCP Monthly Payment and Costs:

• Downpayment: £3,000

• Monthly Payment: £380 per month

• Total Cost Over 36 Months (excluding final balloon payment): (£380 × 36) + £3,000 = £16,680

• Balloon Payment (GMFV): Approximately £12,000

• Total Cost to Own (if you pay the balloon payment): £16,680 + £12,000 = £28,680

Comparison to Other Financing Options for Used EVs:

• Hire Purchase (HP): With HP, you’d pay a deposit (e.g., £3,000) followed by fixed monthly payments to cover the full cost of the EV, with no balloon payment. For the same Polestar 2, HP monthly payments might be around £550 per month over 36 months, leading to a total cost of (£550 × 36) + £3,000 = £22,800. This is cheaper than PCP if you plan to own the EV, but monthly payments are higher.

• Outright Purchase: Buying the Polestar 2 outright would cost around £25,000 upfront, avoiding any financing costs. This is the most cost-effective option if you have the capital and plan to keep the EV for a long time, but it’s not feasible for everyone. Buyers should also consider battery health when evaluating long-term value, as Polestar offers an 8-year/100,000-mile battery warranty, replacing the battery free of charge if its health drops below 70% within that period.

Key Takeaways:

• PCP offers the lowest monthly payments for used EVs, making it an affordable entry into EV ownership, with the flexibility to return, keep, or upgrade at the end of the term. Polestar’s Pre-owned programme adds peace of mind with a 14-day satisfaction guarantee and a 111-point inspection by approved technicians.

• HP provides guaranteed ownership at a lower total cost than PCP (if you pay the balloon payment), but monthly payments are higher, which may not suit all budgets.

• Outright purchase is the most cost-effective option for used EVs if you have the capital, as it avoids financing costs and is ideal for long-term ownership, though buyers should consider battery health and Polestar’s warranty when evaluating long-term value.

• Used EVs like the Polestar 2 provide a premium yet accessible way to transition to electric driving, supporting the mission of ConsideredElectric.com to promote EV adoption.

Tesla Model Y: A Special Case

The Tesla Model Y, the world’s best-selling EV, is currently undergoing a refresh, with the updated model expected to launch in 2024. As a result, the new Model Y can only be ordered on PCP for the time being, as Tesla is prioritizing inventory clearance of the current model. This is likely due to supply chain constraints and Tesla’s strategy to maintain high demand for the refreshed model. However, Tesla is offering some fantastic deals on inventory stock of the current model, particularly via CH.

Example: Model Y Contract Hire vs. PCP

For a Tesla Model Y over 36 months with a £2,821 downpayment and 15,000 miles per annum (Source: Tesla UK Website):

• Contract Hire (CH): £437 per month

• Personal Contract Purchase (PCP): £746 per month

• Difference: £309 per month cheaper with CH

Why This Matters

Tesla is currently offering 0% interest-free finance on PCP, which might seem attractive. However, this example shows that unless you are purchasing outright and simply cannot wait for the refreshed Model Y (which will almost certainly affect the used values of the older model), the real cost of driving a £50,000 EV could be far higher than expected. Choosing CH instead of PCP in this scenario could save thousands over the lease term. Additionally, the upcoming refresh may lower the residual values of current Model Y inventory, making PCP riskier if you plan to trade in or sell the EV later.

Why Financing Options Matter for EVs

The choice between CH and PCP (or other options for used EVs) can significantly influence your EV ownership experience:

• New EVs: CH is particularly appealing for new EVs due to their higher upfront costs but lower running costs (e.g., cheaper electricity vs. fuel, no road tax, lower maintenance). The rapid pace of EV innovation (e.g., better batteries, new models) means leasing allows you to upgrade to the latest technology without losing money on depreciation. For business users, EVs on CH also benefit from low BiK tax rates, enhancing their appeal.

• Used EVs: PCP is the most common financing option for used EVs in the UK, as CH is not widely available. PCP provides an affordable path to ownership, with lower monthly payments and flexibility at the end of the term. Used EVs have more stable depreciation curves after the initial steep drop, reducing the risk of negative equity, though buyers should consider battery health and potential degradation when evaluating long-term value.

Impact of Market Trends

Current market trends can also influence the choice of financing for EVs:

• Shift to Electric Vehicles: The growing popularity of EVs and government policies (e.g., the UK’s 2035 ban on new petrol and diesel cars) make CH attractive for new EVs, as buyers can upgrade to more efficient models as technology improves. For used EVs, PCP makes EV ownership more accessible, supporting the transition to sustainable transport.

• Rising Interest Rates: Higher interest rates increase the cost of PCP agreements (unless you secure a 0% APR deal like Tesla’s), making CH more competitive for new EVs. For used EVs, PCP remains viable, but buyers should shop around for the best interest rates, such as Polestar’s promotional 8.9% APR offer.

• Fluctuations in Used EV Values: Used EV values have been volatile in recent years, particularly post-COVID, due to advancements in battery technology and new model releases. This may make PCP riskier for used EVs if the GMFV is overestimated, especially for older models. CH avoids this risk entirely for new EVs by shifting it to the leasing company.

Environmental Considerations

Your financing choice can also tie into environmental goals:

• Leasing a New EV via CH: This supports sustainability by encouraging regular upgrades to more efficient models, reducing your carbon footprint over time. It also aligns with the mission of ConsideredElectric.com to promote EV adoption and innovation.

• PCP on a Used EV: This extends the life of an existing EV, preventing it from being scrapped prematurely and reducing the demand for new vehicle production, which has a significant environmental footprint. It’s also a cost-effective way to access EV ownership, supporting the transition away from ICE vehicles.

Other Financing Options to Consider

While CH (for new EVs) and PCP (for used EVs) are popular, other financing options may suit certain EV buyers:

• Hire Purchase (HP): HP involves paying a deposit followed by fixed monthly payments, with ownership guaranteed at the end of the term (no balloon payment). This can be a better option for used EV buyers who want guaranteed ownership without the risk of a large balloon payment. However, monthly payments are typically higher than PCP, as you’re paying off the full value of the EV.

• Outright Purchase: Buying an EV outright, whether new or used, avoids financing costs entirely. This is most cost-effective for used EVs with stable depreciation, especially if you plan to keep the EV for a long time. However, it requires significant upfront capital, which may not be feasible for all buyers.

Who Should Choose What?

To help you decide, here’s a summary of the ideal buyer profile for each option:

Choose Contract Hire (CH) If (New EVs Only):

• You want to drive a new EV every few years.

• You prefer lower monthly payments and fixed costs.

• You don’t want to worry about depreciation or resale value.

• You’re a business user looking to benefit from tax advantages, especially on EVs.

• Sustainability is a priority, and you want to upgrade to the latest EV technology regularly.

Choose Personal Contract Purchase (PCP) If (New or Used EVs):

• You’re considering a used EV and want the option to own it, or you’re financing a new EV and prefer ownership flexibility.

• You want flexibility at the end of the term (return, keep, or upgrade).

• You’re comfortable with higher monthly payments and potential balloon payment costs.

• You’re buying an EV with stable depreciation, reducing the risk of negative equity.

Choose Hire Purchase (HP) If (Used EVs):

• You want guaranteed ownership of a used EV without a balloon payment.

• You’re comfortable with higher monthly payments in exchange for no final lump sum.

Choose Outright Purchase If (New or Used EVs):

• You have the capital to buy an EV outright and want to avoid financing costs.

• You plan to keep the EV for a long time, especially a used model with stable depreciation.

Making the Right Choice

Choosing the right financing option for your EV depends on your priorities, financial situation, and whether you’re eyeing a new or used EV. If you’re after a brand-new EV, Contract Hire is often the most cost-effective and hassle-free option in the UK, offering lower monthly payments, protection against depreciation, and the ability to upgrade regularly to the latest EV technology. However, if you’re considering a used EV, Personal Contract Purchase is the go-to financing choice due to the limited availability of leasing options for pre-owned vehicles, providing a balance of affordability and flexibility—though it comes at a higher overall cost if you choose to own the EV.

Before deciding, consider your mileage, budget, and long-term plans. If you’re a business user, don’t overlook the tax benefits of CH, especially for new EVs. And if sustainability is a priority, as championed by ConsideredElectric.com, leasing a new EV via CH can help you stay at the forefront of green technology, while PCP on a used EV can make EV ownership more accessible and environmentally responsible. Whatever your needs, understanding the full range of financing options—CH, PCP, Hire Purchase, or even outright purchase—will ensure you get the best deal on your next EV.

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