Should I lease or buy a car?

After the best value car finance option but not sure if you want the chance to own the car? Read on for the pros and cons of all the options

Dominic Tobin
Aug 28, 2020

Getting the best finance deal on your next car doesn't always mean choosing the model with the lowest cash price. Finding the right way of paying for your car could save you thousands of pounds in the long run, or even allow you to afford a car that you thought was out of reach.

One of the key decisions is whether you want to be able to own the car outright - either by getting a loan and paying cash upfront or owning it at the end of a car finance contract - or lease it, effectively renting the car for a set monthly amount and then returning it at the end.

The right choice for you will depend on the type of car you're looking for, your monthly budget and how long you're planning to keep the car. Businesses will also need to consider the ease of reclaiming tax (see below).

If you know you want to hand the car back, it's worth comparing the overall costs for all the options - by adding up any initial costs and the total of all the monthly payments - and if you'd like to own the car add on any final costs needed to take ownership, such as the optional final payment in the case of PCP finance.

Scroll down for more information, or click below to search deals and prices on all 63927 cars currently available from BuyaCar on PCP finance or Hire Purchase.

 

Leasing a car 

Leasing works like a long-term rental agreement, and is also known as Personal Contract Hire (PCH). It's offered on new cars and normally comes with low monthly payments compared with other ways of getting a car. However, unlike PCP finance or Hire Purchase, there's no chance to own the car with leasing - you have to hand the keys back at the end.

Leases include a mileage limit, which can be altered to suit your likely mileage; go for a higher figure and you'll have to pay a little more every month, though if you go for too low a limit and exceed this you're likely to be issued with excess mileage charges when you hand the car back. You'll have to return the vehicle at the end and may be issued with charges for any damage beyond fair wear and tear, too. You'll then have to find another car, if you still need one.

Personal Contract Purchase (PCP) finance can operate in a similar way, though it's available for used as well as new cars. As with a lease, monthly payments only cover part of the car's value - the amount it's expected to lose over the length of the contract. That means you get lower monthly payments than you would with a loan or Hire Purchase deal. At the end, you can return the car and owe nothing (although excess mileage and damage charges may apply).

You'll also have the option of buying it for the remaining amount owed - the optional final payment (also known as the balloon payment). Alternatively, if the car is worth more than this final payment - known as having equity - you can put this value towards the deposit on your next car, cutting costs on the new car.

While the finance company still owns the car, the company you're purchasing a new car from can settle the finance balance and then the extra value in the car over the remaining finance balance goes towards the deposit on your next car, reducing your monthly payments on the new car.

 

Buying a car

Purchasing a car doesn’t mean that you have to pay for it all upfront. Finance options include Hire Purchase (HP), which spreads the cost of the car over a deposit and a series of monthly payments. You become the owner once the final payment is made.

You can also use PCP finance to access a car. Monthly payments are lower than with an equivalent Hire Purchase deal (assuming the same deposit and contract length), as they only cover part of the cost of the car - the amount of value it's expected to lose over the contract. If you want to own it, you need to make the large optional final payment at the end. If not, you hand the car back with nothing else to pay - provided you've kept to the pre-agreed mileage limit and the car is in good condition.

You can make this final payment - also referred to as the balloon payment - as a lump sum or you can refinance it, paying it off in another series of monthly payments by taking out a Hire Purchase contract, after which you automatically own the car. Be aware, however, that if you do refinance you'll end up paying interest on the amount you borrow again. 

Get to the end of a PCP contract and make the optional final payment, on the other hand, or make all the monthly payments on a Hire Purchase contract and since you've paid in full, you can do whatever you want with the car. You're free to keep it, modify it or sell it as and when you want.

All used cars from BuyaCar are available to buy, with PCP and Hire Purchase available on newer cars and Hire Purchase available on older models, typically those over five years old.

  

Lease or buy a car?

Leasing a car

  • Mostly used for new cars
  • Relatively low monthly payments
  • Simple to regularly change cars
  • You're not affected if the car's value drops unexpectedly
  • Easy for businesses to reclaim VAT

Buying a car

  • New and used cars available to buy
  • Once paid off, it’s all yours
  • No mileage limit or damage charges
  • Able to modify or sell car when paid for
  • VAT less easy to reclaim for businesses

 

Lease or buy a car for the lowest repayments?

If you want a brand new car but don’t think you’ll keep it for more than three or four years, then leasing could be the cheapest option. This 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 contribution discounts 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 can trade it in, using the difference to put towards the deposit for your next car.

As PCP isn't just available for new cars, you may be able to save more by taking out finance on a nearly-new vehicle, a type of car that isn't readily available to lease. An older used car should result in even lower monthly payments for the same car, or you could get a better car for the same monthly payments.

 

Lease or buy a car for the best value?

As buying a car ultimately involves paying the full cost, then you will normally pay more overall to buy a car than to lease one. Remember, though, that at the end of a lease you don't own anything - you've simply been renting the car. Do this on a series of cars and for the same cost you could have bought one with PCP or Hire Purchase.

As for owning a car, you can either pay in cash, spread the cost across even monthly payments with HP finance, or benefit from low monthly payments and a large optional final payment, with PCP finance.

Do this and you will end up with the car, which you can keep for as long as you want, and sell whenever you need to, which will often prove better value than taking out several lease agreements on new cars and not owning anything at the end.

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 car for business

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

The system is set up to promote economical cars, and is based on carbon dioxide emissions. You can claim all lease payments for cars that emit up to 130g of carbon dioxide per kilometre (130g/km). For cars with higher emissions, you'll only be able to claim 85% of the repayments as an expense.

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 bought vehicles in your accounts. Interest is usually tax deductible.

 

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 monthly payments sometimes rival lease payments because manufacturers tend to offer big discounts to customers taking out a this type of agreement. Furthemore, with 0% APR deals that include a deposit contribution discount, it can be cheaper overall to take the PCP option and make the optional final payment at the end to buy the car than paying the list price up front.

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 on these - giving you all the new car feel, but with potentially much lower monthly payment - but these aren’t generally 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 the optional final payment). You’re also able to buy it, 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 typically available on these, though, so you’ll be the car’s owner once you have made the final payment. As a result, the older a car is the easier it is to buy it rather than lease, though PCP finance, where you can hand the car back at the end of the contract, is often available on cars up to five years old.

        

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