Car leasing vs PCP explained

Both car leasing and PCP finance can be cost-effective routes to low monthly payments, but they work slightly differently

BuyaCar team
Jun 16, 2021

Whether you choose to lease a car via a Personal Contract Hire (PCH) deal or to finance your next car with Personal Contract Purchase (PCP), you can take advantage of low monthly payments compared with the value of the car. Both options work for those who plan to hand the car back at the end of the contract and move onto another one.

However, despite the similarities, there are significant differences between these two ways of paying for a car. PCH lease deals, for instance, tend to only be available on brand new cars, meaning that you won’t be able to benefit from the far lower prices of nearly new and second-hand cars. With PCP, though, you can finance both new and used models, with used cars opening up the possibility of even lower monthly payments.

Another difference is that you have to hand back the car at the end of the contract term with a lease, whereas a PCP deal is more flexible. You can hand the car back at the end of a PCP contract if you want, but you can also buy it by making the large, pre-agreed optional final payment.

With PCP you can even effectively trade the car in for a new model - and this is especially appealing if the car is worth more than the optional final payment. Should the car be worth more than the remaining finance balance, you can put this extra value - known as equity - towards the deposit on a new car. The more equity you have, the more this will reduce monthly payments on your next car.

Furthermore, it's much easier to end a PCP contract early - which you might want to do if your circumstances suddenly change and you can no longer afford the monthly payments, or if you 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-agreed 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.

Scroll down for more details about car leasing and PCP finance 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 finance

Car leasing

  • Normally only offered on new cars
  • Works like a long-term rental contract
  • 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 finance

  • Available 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 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 as is the case with most other methods of paying for a car.

If you're after the lowest possible monthly payments, therefore, both could work for you better than other types of finance. However, the way that they work is quite different and it's important to consider that you don't own the car at the end of the contract with either. There's no option to take ownership with leasing, though it is possible to buy the car with PCP at this stage.

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 contract 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 contract term, you have to return the car. While you can ask about the possibility of buying it, there's no guarantee that it will be possible or how much the car would cost at this stage, as leasing is set up with the understanding that you have to hand the car back when the contract ends.

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 amount of value that the vehicle is expected to lose during the term. This makes payments more affordable compared with a Hire Purchase setup where monthly payments cover 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 with PCP.

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. As a result, if you know that you want to keep the car, it's best to plan how you'd pay for this from the start of the contract, though it is possible to refinance this amount, too. 

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 it's worth more than the optional final payment, the retailer will settle the finance for you and give you any extra - 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 looking to run 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 being able to own the car.

PCP deals are generally competitively priced, though, thanks to new car discounts, including deposit contributions that reduce the cost of finance, additional savings and even 0% finance - where no interest is charged.

You'll also have the flexibility to change your mind and buy the car at the end with PCP finance, and it's normally possible to trade up to a different car before the end of your contract, but this will depend on the value of your car, the remaining finance balance and your financial situation.

 

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