Lease or buy a car?

Lease vs buy: which option is best value for you?

Dominic Tobin
Mar 22, 2018

Leasing a car 

If you choose to lease a car then you are most definitely not buying it. You’re entering into a long-term rental agreement. Leasing (also known as Personal Contract Hire), is available for new cars and is often the cheapest way of driving one. However, the low monthly costs do come with a mileage limit, charges for damage and the requirement to return the car at the end.

It’s also worth looking at Personal Contract Purchase (PCP) finance, which is available for new and used cars and allows you to return the car at the end in the same way as a lease. You also have the option of buying the car. In many cases, it will also be worth more than forecast, giving you a third option of putting the difference towards a deposit on another agreement.

 

Buying a car

Buying a car doesn’t mean that you have to pay for it up front. Finance options include Hire Purchase (HP), which spreads the cost of the car over a series of monthly instalments. You can reduce your monthly payments with PCP but will then need to save up for the large final payment to buy the car at the end. With full ownership of a car (which usually comes at the end of a finance agreement), you’ll be able to sell or modify it when you wish.

        

Scroll down for more comparisons on whether it’s best to lease or buy a car

Leasing a car

  • Low monthly payments, so you don’t need large savings
  • Simple to change your car at the end, with a new lease
  • No worries about the car losing value unexpectedly

Buying a car

  • Once paid off, it’s yours, with no further finance payments
  • You won’t have any mileage limit or damage charges
  • You’re free to modify or sell the car once you’re the owner

 

Lease or buy a car for business

VAT-registered businesses can benefit from leasing, as they can recover 50% of the VAT and reclaim tax on the repayments. This is based on estimates that half of the mileage covered by company cars is for private use. Lease payments are also tax deductible, making it easy to account for.

You're less likely to be able to reclaim VAT if you buy the car, whether it's with cash or by using finance. At the moment, this includes PCP. Unlike leasing, you are unable to get a partial refund. In order to get all of the VAT back, you'll need to show that a car is used entirely for business purposes and cannot be used privately. This often means that it can't be taken home by employees.

Tax relief is less straightforward too, as you'll need to write down the value of vehicles that are bought in your accounts. Interest is usually tax deductible.

 

Lease or buy a car for the lowest repayments?

If you want a new car but don’t think you’ll keep it for more than three or four years, then leasing could be the cheapest option. The simple, straightforward arrangement often results in the lowest monthly payments on new cars.

However, it is also worth comparing the cost of leasing with a Personal Contract Purchase (PCP) quote. Manufacturers typically offer generous incentives to new car buyers taking out PCP finance, including deposit contributions and sometimes 0% interest. You’ll be able to return the car at the end - in the same way as a lease - while also having the option to buy for a set fee. If the car is worth more than that fee, then you may be able to trade it in, using the difference to cover the deposit for your next car.

PCP is likely to be the best choice if you want a used car with low monthly repayments, as leasing isn’t normally available.

 

Lease or buy a car for the best value?

As buying a car ultimately involves paying the full cost, then you will pay more than with leasing. You can either pay in cash, spread the cost evenly with HP, or benefit from low monthly payments and defer the cost of the car to the end, with PCP.

However, you will end up with the car, which you can keep for as long as you want, and sell whenever you need to. Owning one car long-term will often be cheaper than leasing several for three years at a time.

Paying upfront in cash can also be less expensive overall than taking out finance because you won’t face any interest charges (although your money won’t be in the bank earning interest either).

 

Lease or buy a new car?

New car leases are increasingly popular, thanks to low monthly payments and the simplicity of getting a new model at the end.

PCP finance payments sometimes rival lease instalments because manufacturers tend to offer the biggest incentives and discounts to customers taking out a this type of agreement agreement. With 0% deals especially, it’s often cheaper to buy with PCP than to pay with cash.

However, some of the best new car deals are available on pre-registered or nearly-new cars, which already have a number plate and at least one owner (which is often a dealership). As these aren’t classed as brand new, you can often save thousands of pounds. PCP finance is available, but these aren’t available to lease.

 

Lease or buy a used car?

PCP finance allows you to make low monthly payments for a used car and then return it at the end of the agreement (or trade it in if it’s worth more than forecast). You’re also able to buy it too, which means that you can keep your options open.

This type of finance isn’t available for most cars that are more than five years old. Hire Purchase finance is available, so you’ll be the car’s owner once you have made the final payment.

        

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