Car leasing vs PCP

Both offer low monthly payments but come with different limitations. Car leasing vs PCP explained

BuyaCar team
Jul 17, 2018

Car leasing and personal contract purchase (PCP) finance can seem very similar.

Both allow you to drive a car for relatively low monthly payments, which don't cover the full cost of the car. You can return the car at the end without having to pay any further instalments.

Both leasing and PCP will also involve penalty payments if you exceed an annual mileage limit or damage the car while you have it.

But these apparently similar schemes have significant differences, so it’s important to choose the one that offers the options you require.

 

For a start, leasing is generally only available for new cars, whereas PCP can be used for new and used models.

Leasing requires you to return the car at the end of the agreement, while PCP includes an option to buy it. Depending on its value, you may also be able to trade it in for another car.

 

Car lease vs PCP: the main differences

Car leasing

  • Normally for new cars
  • Long-term rental agreement
  • Good credit score required
  • Mileage limit & damage charges apply
  • Initial rental payment required
  • Relatively low monthly payments
  • Car must be returned at the end of the agreement
  • Difficult to end a leasing agreement early

PCP

  • For new and used cars
  • Finance agreement charging interest
  • Poor credit scores considered
  • Mileage limit & damage charges apply
  • No-deposit option often available
  • Relatively low monthly payments
  • Option to return or buy the car at the end. Trade-in option may be available.
  • Can be ended early - often at additional cost

 

Car lease vs PCP: how they work

Monthly payments for PCP finance and leasing are generally lower than those for other types of finance, including Hire Purchase and bank loans because they don't cover the full cost of the car. However, the way that they work are quite different.

Car leasing

Leasing is long-term car rental. Once you've chosen your car, you'll decide how long you want it for (typically two to four years) and your expected annual mileage. Throughout the agreement you'll make a fixed monthly payment, in addition to an initial rental payment, which is usually equivalent to between three or twelve of the monthly instalments. No interest is charged.

The car is always owned by the leasing company. At the end of the agreement, you return the car. While you can ask about the possibility of keeping it, there's no guarantee that it will be possible. Charges for excessive damages apply and you'll also face a penalty if you have exceeded your mileage limit. If the car is worth less than expected at the end of the lease, it's not your problem.

PCP

PCP finance works very differently to leasing because you borrow the full value of the car and pay interest on your remaining debt. You'll often pay a deposit, but a no-deposit option may be available.

During the course of the agreement, you make monthly payments which only cover part of the car's cost - the value that the vehicle is expected to lose during the term. This makes instalments more affordable, but also means that you don't own the car automatically after you've made the final payment.

At the end, you should have a car that's worth roughly the same amount that you still owe. You can return it and walk away or buy it by paying off the remainder of what's owed, known as the balloon payment, which can normally be refinanced.

However, there may be a third option. You'll often find that your car is worth a little more than the balloon payment (in other words, your monthly instalments are slightly higher than they need to be). You can trade the car in with any dealership and use the difference towards another vehicle. It's often used as a deposit on another PCP agreement. Alternatively, you can sell the car with the agreement of your lender. The proceeds are used to repay the finance and you keep any surplus.

 

Car lease vs PCP for new and used cars

If you're buying a used car, then the choice is simple: leasing is unlikely to be available, so PCP is likely to be the best option for relatively low monthly repayments and flexibility.

If you're buying a brand new car, then leasing will often offer the cheapest monthly instalments. As long as you have no intention of keeping the car at the end of the agreement, then this may be your best option.

PCP deals are generally competitive, though, thanks to manufacturer incentives, including deposit contributions towards the finance arrangement and additional discounts. You'll also have the flexibiity to change your mind and buy the car at the end, and it's normally possible to trade up to a different car before the end of yur agreement, but this will depend on the value of your car and your financial situation.

 

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