Are you unsure of whether you should lease or purchase your next car? If so, you’re not alone.
Whether you lease, otherwise known as PCH (Personal Contract Hire) or buy through PCP (Personal Contract Purchase), HP (Hire Purchase), or a personal loan should depend on your driving needs and preferences. This guide will streamline your knowledge of each option’s pros and cons so you can confidently decide which option better suits your requirements. There are several key differences between the two methods.
On a basic level, leasing involves using a vehicle for a fixed amount of time at a specific monthly rate. These monthly payments cover the car’s depreciation during the lease period. Once a lease’s predetermined amount of time expires, you can decide whether to move on to another lease or hand the keys back and walk away. It’s helpful to think of leasing as a long-term rental.
Alternatively, buying a vehicle through HP finance, consists of monthly payments going toward the car’s total value, while PCP monthly payments cover the vehicle’s depreciation. After an HP term, a borrower pays an option-to-purchase fee to achieve ownership. In contrast, to attain ownership, PCP borrowers must pay a balloon payment and option-to-purchase fee to cover the car’s remaining value.
Personal loans give you full ownership of a vehicle from the start. When buying vs. leasing, drivers can keep the car indefinitely, sell it, and modify it once there’s no remaining loan balance or if a lender gives permission.
Let’s take a closer look at the nuances of leasing vs. buying so you can make progress toward attaining your ideal driving experience.
Advantages of leasing
Leases typically last anywhere from two to five years, representing an ideal option for those who don’t want to commit long-term to a single vehicle and enjoy driving something new every few years.
In addition to covering depreciation, the monthly lease payment primarily involves fees like road tax, the first month’s payment, the acquisition fee, registration, and rent, which is the interest you pay for using the car.
Since you’re paying off the vehicle’s depreciation, its residual value is predetermined, meaning you’ll get an estimate of what the car will be worth at the end of your term. Later, we’ll discuss why car finance is less advantageous regarding residual value. Leases typically require little to no down payment. In contrast, a down payment for vehicle finance generally ranges from 10% to 30% of the car’s total value.
More driving choices
Another significant advantage of leasing is how this method’s lower monthly payments can help you get behind the wheel of a newer, more desirable vehicle that your budget may not accommodate through buying. Newer cars mean experiencing the latest tech, including advanced driver-assistance safety features.
Lower average repair costs
Repair costs can quickly rack up a large bill. However, most repairs are covered by a lease’s bumper-to-bumper warranty since you’ll be leasing during the protection period. Most leases allow you to add a maintenance contract covering routine maintenance like oil changes, while some deals can offer this type of work for no added cost.
Gaining coverage in these areas allows you to reduce the amount of things you’re paying for to focus on gas or charging, your monthly payment, and insurance. Leasing a newer vehicle also means there’s a lower likelihood of you experiencing mechanical issues.
Custom terms
Leases are generally more strict with their requirements since the method can be considered a long-term rental. Still, they offer customization in vital areas like agreement length, mileage, and initial payment.
Downsides of leasing
It’s essential to understand that car leases come with mileage limits, and tampering with the odometer is strictly prohibited. Exceeding a lease agreement’s mileage limits will result in penalty charges, which can be a dealbreaker for those long work commutes or an appetite for road trips. However, if preferred, you can customize a lease agreement’s mileage allotment by paying for more.
Not building equity
Earlier, we highlighted how you did not pay to own a vehicle during its lease agreement. Besides the car acting as a long-term rental, you’re not building equity with the vehicle and could miss out on potential resale value.
You also won’t be able to sell a leased vehicle anytime you want like you can with financing. Many lenders will allow customers taking out loans to sell a car. The lender would subtract what the borrower owes from the vehicle’s profit before paying the customer any money remaining from the sale. You’ll want to ensure a car is worth more than you owe before selling to avoid paying out differences to a lender.
Modification restrictions
Car modifications don’t always mean something that’s straight out of a Fast & Furious movie. A modification can be something as straightforward as adding alloy wheels. Still, leases don’t allow modifications of any kind—even if they’re minor and not waking up your whole neighborhood.
Excessive wear and tear penalties
When you rent a car, there’s a solid chance you’ll drive more carefully since the vehicle isn’t yours. Some go the opposite route, but this can result in damage charges. The same rule of thumb applies to leasing. A lease agreement will outline what’s considered normal wear and tear. Excessive wear and tear incurred during your agreement will result in penalty fees. Standard wear and tear, as defined in a lease term, is not the same as damage.
Still, beyond dodging additional charges, the possibility of buying off the vehicle’s remaining value to attain full ownership and selling should motivate you to take care of the car.
While it’s nice to save money on lower-cost repairs during a lease, thanks to perks like bumper-to-bumper warranty coverage and possibly complimentary maintenance, you’ll lose these savings once your lease ends unless you transition into a new lease.
Still need to undergo common application steps
Similar to buying, you’ll still need to pass a credit check to get approved for lease, and failure to pay monthly costs will result in repossession of the vehicle. Ending a lease contract will subject you to a fee that’s often significant.
Advantages of buying
While leasing gives you the freedom to conveniently change cars every few years, buying allows you to avoid mileage limits. Even though it’s easier to walk away from a vehicle you’re leasing after the term ends, you can sell a car anytime. Additionally, if you buy it upfront, you won’t have to deal with ongoing payments and interest costs.
Excess wear and tear or aesthetic damage will affect a financed vehicle’s resale value, but you won’t face penalty fees like you would at the end of a lease agreement. Once you pay off a car loan or buy a vehicle outright, you’ll have no restrictions on any modifications you want to add. Generally, drivers with a loan must ask the finance company for modification permissions.
Downsides of buying
We previously noted that initial costs are higher on average when buying than leasing.
If you decide to finance with a loan, you’ll also have to pay:
- Vehicle Excise Duty (VED), also known as road tax
- Fee for registering and taxing a car for the first time with the DVLA (£55)
- Optional extras like extended warranties
Monthly loan payments are inflated with interest that’s often higher than leasing. If the vehicle you’re financing depreciates in value, the car may be worth less than what you owe if you decide to sell.
More commitment
Asking yourself how long you plan on keeping a vehicle should play a central role in whether you should lease or buy. Buying is not as flexible if you plan to change cars regularly, whereas leasing makes less sense if you aim to run a vehicle for its entire life.
If you decide to sell a car, you’ll also have to maintain legal standards while maximizing profit through a private sale. Dealerships do a lot of the heavy lifting regarding paperwork when purchasing your vehicle, but this convenience comes at the expense of lower average profit.
Lastly, ask yourself if you have enough money to cover maintenance and possible repair costs. You might get routine maintenance coverage for a period when buying a new car, but you won’t with a used vehicle. You’ll also need an annual MOT certificate three years after registering a new car, whereas most leases expire in three or fewer years.
Leasing vs. Buying Wrap-Up
We’ve underscored some vital questions to ask yourself when deciding whether to lease or buy your next vehicle, but a great place to start is determining what level of importance you place on car ownership. Those not as concerned with owning a vehicle are likely attracted to leasing and driving a newer car with more advanced tech.
Mileage allotment is another factor that makes or breaks many drivers’ decisions to lease vs. buy. If your work commute is short and you often run errands and head to locations near your home, you may be better suited to leasing. Still, you don’t have to feel like leasing your next vehicle will keep you in a cycle of endless agreements. Drivers who aren’t prioritizing owning a car now but would like to own one in the future may place monthly savings from leasing toward a new vehicle when their lease expires.
Simplify car finance
Are you interested in learning more about the loan support you can get with your budget? Head to our site’s Finance Calculator for an estimate in less than a minute. If you’re wondering how your credit score can impact vehicle financing, check out our blog, which explains whether a specific credit score is required for car finance.
Our blog also covers topics like whether you need a driver’s licence to get approved for car finance.
