Should I lease or finance my car?

You can keep monthly payments low with both leasing and car finance, but there are big differences between them. Here’s how they work

BuyaCar team
Apr 29, 2022

On the face of it, both car finance and leasing seem like very similar propositions. After all, you make regular monthly payments for both of them to have a car on your drive. Yet leasing actually works very differently from other car finance in several key respects - especially when considering your options and obligations at the end of the contract.

There’s almost certainly both a leasing or finance deal out there to suit you, but finding the right one can be tricky. Our comprehensive guide to car finance gives you all the detail on your finance and leasing options. You can also watch the video below for an overview of your monthly payment options.

In effect, a car lease deal is like a long-term rental contract. In fact, the clue’s in the formal name for it: Personal Contract Hire (or PCH). In essence, you commit to make payments over a set term and at the end you hand the car back - just like you would do if you were renting a car on holiday. You'll have to stick to a mileage limit and you’ll pay a penalty for every extra mile if you exceed this. Extra charges also apply for any damage beyond fair wear and tear - just like with a rental car.

Meanwhile, car finance deals involve borrowing money, so you’ll be paying interest (unless you have a 0% APR deal). However, this form of paying for the use of a car tends to be more flexible - particularly in the case of Personal Contract Purchase finance (or PCP).

With a PCP deal, you can choose to buy the car at the end of the contract by making the large optional final payment, or you could hand the car back with nothing more to pay (provided you've stayed below the mileage limit and haven't damaged the car) or end the agreement and refinance. It's also easier to finish the contract early than with leasing and is likely to cost you less to do so.

Watch our video guide below to get an idea of the different options - and keep reading for an overview of the differences between car finance and leasing.

Types of car leasing and finance

Leasing offers relatively flexible contract options for brand new cars, with drivers able to choose the following elements:

  • How long you want to use the car (usually between two and four years)
  • How many miles you expect to cover each year (typically 5,000 to 30,000 miles)
  • How much you want to pay upfront (the higher the amount, the lower your monthly payments)

Your monthly payments are then calculated on the basis of these factors. These payments may be cheaper than equivalent finance figures on the same new model, though this varies car by car. You'll pay the same amount amount each month until the end of the agreement, at which point you have to return the car.

At this stage, you will be charged extra if you've exceeded the pre-agreed mileage limit or the car has been damaged beyond reasonable wear and tear - which is set out in a booklet that any leasing company can provide.

If you're after the lowest possible monthly payment, do bear in mind that leasing is typically only available on new cars. PCP finance on the other hand, which promises similarly low monthly payments, is available on used cars as well as new ones. As a result, if you're after the lowest monthly payments, it may be worth going for PCP finance on a nearly new or used car rather than leasing a new one.

Finance offers even more options. In a similar way to leasing, you can choose:

  • The length of the contract
  • The annual mileage limit (depending on the type of finance)
  • The deposit amount (there may be a no-deposit option, but this results in higher monthly payments)

Hire Purchase and Conditional Sale agreements split the full cost of a car into an upfront deposit and equal monthly payments. Once all the payments have been made, you’ll own the car, although the monthly payments are more expensive than leasing or PCP finance ones because, along with the deposit, they cover the full cost of the car, plus any interest that is charged, rather than just the amount of value the car loses over the contract, which is the case with leasing and PCP (although PCP includes interest costs). More details

Personal Contract Purchase (PCP) monthly payments only cover part of the car’s value - effectively the value it loses over the length of the contract - plus interest, so monthly payments are low, similar to leasing. At the end of the agreement, you can hand the vehicle back without anything else to pay - like a lease. Be aware, though, that you'll need to pay extra charges if you've exceeded the mileage limit or there's excessive damage to the car.

However, unlike leasing, you'll also have the option of buying the car at the end of the contract by making a pre-agreed payment - the optional final payment. Pay this and you'll officially own the car. Alternatively, if the car is worth more than the remaining finance balance at the end of the contract, you can trade it in and put the extra value towards the deposit on your next car, reducing monthly payments on your new vehicle. More details

Lease Purchase is typically used for vans. It offers low monthly payments like PCP but you’re committed to buying the vehicle at the end of the agreement. More details

Cars available on lease and finance

Leasing is normally only available for new cars, whereas finance is offered on new and used vehicles. As a result, for the cheapest monthly payments consider finance on a nearly new or used car, as these cheaper cars should provide you with lower finance costs.

Manufacturer finance generally offers the lowest interest rates and best value if you’re buying new. For used cars, there are likely to be cheaper options, however, as manufacturers typically do not subsidise used car finance as they do with new car finance, which typically involves deposit contribution discounts and low APR.

 

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