Should I lease or buy a car?
If you’re looking to finance your next car, you may be considering whether to lease one or to buy it outright. Here are your options
Going for the lowest outright cash price isn’t always the way to get the best value finance deal - or the type of finance arrangement that’s best for you. And it’s worth doing your research - because finding the right way to pay for your car could save you thousands of pounds, or get you behind the wheel of a far better model for your budget than you thought possible.
One important factor to consider is whether you want to have the option of owning the car outright or not. You can achieve this with a traditional personal loan, or with types of finance such as Hire Purchase (HP) - where you automatically own the car at the end of the contract - and Personal Contract Purchase (PCP), where you have the option to buy the car outright when the contract ends.
If, however, you aren’t interested in technically owning the car at all, then you can lease it. This means you effectively hire the car for your exclusive use for a set monthly amount and over a fixed period of time - then you simply return it to the leasing company 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. Meanwhile, if you'd like to own the car you need to add on any final costs needed to take ownership, such as the optional final payment in the case of PCP finance.
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. The deposit and monthly payments only cover part of the car's value - the amount it's expected to lose over the length of the contract, plus a little interest. That means you get lower monthly payments than you would with a traditional personal loan or HP deal, where the entire cost of the car is covered by any deposit and monthly payments.
At the end of the contract with PCP 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 a PCP agreement to finance use of 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, after which you automatically own the car. Be aware, however, that if you do refinance this way 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 or sell it as and when you want.
Used cars are available to buy with cash, with PCP and Hire Purchase available on newer cars and Hire Purchase available on older models - typically those over five years old, where PCP is often not available.
Lease or buy a car?
Leasing a car
- Mostly used for new cars
- Relatively low monthly payments
- Simple to regularly change cars
- You don't lose out 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 – which offers the lowest payments?
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 often offer substantial financial 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 cost. If the car is worth more than that figure, then you can trade it in, using the difference to put towards the deposit for your next car.
As PCP is also available for second-hand 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 for owning a car, you can either pay in cash all at once, 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.
Paying upfront in cash can also be less expensive overall than taking out finance because you won’t face any interest charges.
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. Historically, the system is set up to promote economical cars, and is based on carbon dioxide emissions, with the ability to claim back more tax on lower emission cars.
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?
Leasing deals for new cars are popular, thanks to low monthly payments and the simplicity of the setup - you can simply take out another lease on a new car at the end of a lease term.
PCP finance deals can sometimes match lease deal monthly payment rates because manufacturers tend to offer big discounts to customers taking out this type of finance. Furthermore, 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 payments - though 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). This is similar to a lease deal in many respects, but you’re also able to buy it at the end, 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, though this finance setup has higher monthly payments than equivalent PCP finance or lease deals.