Car leasing vs PCP explained

Car leasing and PCP finance both offer low monthly payments but come with different pros and cons: keep reading to find out which is for you

BuyaCar team
May 30, 2020

PCP (Personal Contract Purchase) finance and car leasing - also known as Personal Contract Hire (PCH) - both offer low monthly payments with the option to return the car at the end of the agreement. And while they appear similar on paper, they offer significantly different features. For example, car leasing is generally only available for new vehicles, whereas PCP can be used for new and used cars.

Leasing also requires you to hand your car back at the end, while PCP gives you the option to buy it by making the optional final payment. Meanwhile, it's much easier to end a PCP contract early - for instance if your circumstances suddenly change and you can no longer afford the monthly payments, or need a larger car - than it is with leasing. So it's worth thinking about how important flexibility is for you - before signing on the dotted line.

Both leasing and PCP - if you return the car at the end of the contract in the case of PCP - can also involve additional charges if you exceed the pre-agreedย mileage limit or cause damage to the car above fair wear and tear. However, this isn't applicable with PCP finance if you make the optional final payment - do this and you become the owner of the car. There is no option to do this with a lease, though.

Scroll down for more details about car leasing and PCP finance for more information to help you decide which option is the best for you - plus BuyaCar video guides to leasing and PCP finance, or click below to search used and nearly-new cars that are available with finance.

Car leasing vs PCP

Car leasing

  • Normally only offered on new cars
  • Works like a long-term rental agreement
  • A good credit score is required
  • Excess mileage and damage charges apply
  • Initial rental payment required
  • Relatively low monthly payments
  • Car must be returned at end of agreement
  • Difficult and costly to end agreement early

PCP

  • For new and used cars
  • Finance agreement involves interest
  • Poor credit scores considered
  • Mileage and damage charges may apply
  • No-deposit option often available
  • Relatively low monthly payments
  • Option to return, buy or 'trade in' car at end
  • 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 is quite different.

Car leasing

Leasing is essentially a form of long-term car rental. Once you've chosen the car you want, you decide how long you want it for (typically two to four years) and your expected annual mileage. Throughout the agreement you'll make fixed monthly payments, in addition to an initial rental payment, which is usually equivalent to between three and 12 of the monthly payments.

The car is always owned by the leasing company. At the end of the agreement, you have to return the car. While you can ask about the possibility of keeping it, there's no guarantee that it will be possible or how much the car would cost at this stage. Charges for any damage beyond fair wear and tear apply and you'll also face a penalty if you have exceeded your pre-agreed mileage limit. If the car is worth less than expected at the end of the lease, it's not your problem, though, the leasing company takes the risk.

PCP finance

PCP finance works very differently to leasing because you borrow the full value of the car and pay interest on the remaining debt. In many cases you'll have to pay a deposit, though you can usually opt for larger or smaller deposits, and no-deposit options are often available.

During the course of the contract, 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 payments more affordable compared with a Hire Purchase setup where you pay off the whole value of the car, but also means that you don't own the car automatically after you've made all the monthly payments. If you want to own it you have to make the large optional final payment. Depending on the car and contract terms, this typically amounts to a third to half of the car's initial price.

At the end of the contract, you should have a car that's worth roughly the same amount as what you still owe. You then decide on the best option for you. You can:

  • Return the car to the lender with nothing further to pay (provided it's in good condition and within the mileage allowance).
  • Pay off the remainder of the finance, known as the optional final payment, which can normally be refinanced and own the car.
  • 'Trade in' the car in with a car retailer. If the car is worth more than the optional final payment, the retailer will settle the finance for you and give you any surplus - known as equity - to put towards the deposit on another car.

Car lease vs PCP for new and used cars

If you're purchasing 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 payments and the flexibility of being able to hand it back at the end of the contract.

If you're buying a brand new car, then leasing will usually offer the cheapest monthly payments, as long as you're happy with being tied into stricter contract terms - it's typically harder and more expensive to return a leased car early than one on PCP - and not be able to own the car.

PCP deals are generally competitively priced, though, thanks to manufacturer incentives, including deposit contribution discounts towards the finance costs, additional discounts and even 0% financeย - where no interest is charged.

You'll also have the flexibility 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 your agreement, but this will depend on the value of your car and your financial situation.

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