Should lease or buy your next car? It’s a question you may be pondering when it comes to getting a new set of wheels, and it can be tricky to decide which way is best for you.
The vast majority people who purchase new cars do so using a Personal Contract Purchase, or PCP, but leasing – which is essentially long-term rental – has been growing in popularity in recent years, with an estimated five million leased vehicles in the UK, of which around 1.9 million are said to be private leases.
Could leasing be right for you? This article will help you decide.
What is leasing and how does it work?
A lease deal is essentially a long-term rental. Personal Contract Hire (PCH) is the main way of leasing a car, and this see you pay a deposit followed by a series of monthly rental fees for an agreed amount of time. This is typically two to four years, while you can vary the size of your deposit, with a larger downpayment resulting in lower monthly outgoings.
At the end of the lease period, you’ll need to hand the car back, with no contractual option to purchase the vehicle – although some leasing firms may let you buy it if you ask. During the period of the lease, you will not own the car – it remains the property of the finance company, and if you do not keep up repayments the car can be repossessed.
What are the different ways to buy a car?
Buying will see you take outright ownership of the car, or have the option to do so in the case of PCP finance.
Your options for buying are:
Cash or credit card
You can pay the full costs of a car upfront with savings and any part-exchange you may have. You will own the car outright from the off, with no ongoing payments – although you will have to be mindful of depreciation and other ownerships costs, and could invoke heavy interest payments if you are buying a car with a credit card and don’t pay the balance off swiftly.
Taking out a loan is and using the money from this to buy a car outright is another option worth considering, particularly if you can find a favourable interest rate. You’ll need approval for a loan, must make repayments on time and have a good credit standing.
Loans can either be secured (meaning you offer an asset – typically your house) as security, meaning the asset can be repossessed if you fail to keep up repayments. An unsecured loan, also known as a personal loan, meanwhile, will see money lent to you without you having to put an asset up as surety. Secured loans tend to bring lower interest rates than unsecured loans.
Hire Purchase (HP)
A Hire Purchase agreement is a type of finance that sees you rent a car over a period of time, with your monthly repayments paying off the vehicle, which you will own outright at the end of the deal. HP agreements are not as popular as PCP deals (see below), partly because they are less flexible, and partly because they tend to bring higher monthly repayments.
Personal Contract Purchase (PCP)
PCP finance sees you pay a deposit at the start of an agreement, set monthly payments for the duration of the deal (typically two to four years), and then an optional final balloon payment. The deposit and monthly repayments of a PCP deal are actually paying off the car’s depreciation, with the final balloon payment being the car’s guaranteed minimum future value (GMFV) – an amount set by the finance company that the car is contractually promised to be worth at the end of the deal period.
At the end of a PCP deal you have three options: hand the car back without making the final payment, owing and owning nothing; paying the balloon and owning the car outright; and using any ‘equity’ accrued during the course of the deal to go towards the deposit on a new car – though you will typically need to choose a car from the same brand and funded using the same finance company to roll this ‘equity’ over.
We place ‘equity’ in inverted commas as while this is the colloquial term for the concept; what the money actually represents is that you have paid more than the car actually depreciated over the course of the deal. Also bear in mind that the car remains the property of the finance company unless you make the balloon payment.
Car leasing vs buying comparison
|Fixed monthly payments||✘||✔||✔||✔|
|Charges for excess miles||✘||✔||✔||✔|
|Own the car during the term||✔||✘||✘||✘|
|Option to own the car at the end of the term||✘||✔||✔||✘|
|Easy to end the contract after paying 50%||✘||✔||✔||✘|
|Different options at the end of the term||✘||✘||✔||✘|
|Option to pay a settlement figure to own the car||✘||✔||✔||✘|
|Payments could include delivery, breakdown, road tax and a warranty||✘||✔||✔||✔|
What are the key differences between leasing and buying a car?
The difference between buying a car and leasing one is effectively the difference between buying a house and renting one. As with houses, you can use finance packages to help you fund a car – although while with a mortgage you will be classed as a homeowner (with the mortgage essentially being a secured loan – see above), the vast majority of car finance packages – including PCP and HP – see the finance company own the vehicle throughout the deal – although with these you will potentially own the car once the contract is up.
Leasing differs, in that the car is simply rented over a fixed period and with certain terms (mainly related to the mileage you can cover, how you service the car, and its overall condition).
Pros and cons of leasing a car
Pros of leasing a car
- Monthly payments tend to be lower than financing
- Short-term agreements are often available, making it it easy to swap into a new car often
- No large fees at the end of an agreement
- Minimal maintenance costs
Cons of leasing a car
- You don’t have the option to own the car
- Leasing agreements tend to have strict mileage limits with further costs for going over those
- You’ll need to pay to give the car back before the end of your contract
- Terms and conditions can be lengthier
Pros and cons of buying a car
Pros of buying a car
- You’ll own it outright, or have the option to
- Less strict mileage restrictions for finance, and none for outright
- Option to hand the car back early if financed
- Fewer/no conditions on how you use the car
Cons of buying a car
- Buying typically works out more expensive on a monthly basis
- Finance agreements tend to be locked in for longer than lease deals
- You’ll have to bear the cost of depreciation
- Selling a car can take time
Is it cheaper to lease or buy a car?
This is a bit of a tricky question to answer, as there are so many variables to consider. First, while a PCP contract will not see you own a car unless you make the final balloon payment, in conceptual terms PCPs may give a sense of ownership As such, leasing a car can be cheaper than using using PCP finance.
Like renting a house, you aren’t paying anything towards ownership of the car when leasing and you’ve got to stick to strict terms. That said, you won’t have to be worried about extra costs as long as you follow those. Financing a car is more like taking a mortgage. You will need a larger deposit and may pay more each month, but you’ll own the car — or at least have the option to — at the end of an agreement.
Though, as with a house, if you own a car, you’re the one responsible for keeping it legal and roadworthy – there’s no landlord of finance company in the background to provide support.
Is it better to lease or buy a car?
Whether it’s better to lease or buy a car ultimately comes down to your preferences and circumstances. You may consider that buying a second-hand car outright is a better move than either leasing, or using a PCP deal to obtain a new car, for example.
When it may be best to lease a car
- You favour monthly lower costs over owning a car outright
- You like to change into a new car frequently
- You use the car for business — you may be able to get lower business lease rates
- Your driving patterns tend to be steady over time
- You want a predictable bills and outgoings
When it may be best to buy a car
- You want outright ownership of the car
- You’re happy to stick with one car for multiple years
- You don’t want to be bound by strict mileage limits
- Your financial circumstances may change in the future
Lease or buy your next car with carwow
carwow has a great range of attractively priced lease offers to chose from – simply follow the link below to peruse them.
And even if leasing isn’t right for you, if you’re looking for an easy way to change your car, then carwow is the place to go. You can sell your old car for a great price, and get the best deals on a new one. All through our network of trusted dealers and all from the comfort of your home. Tap the button below to get started today.