Should you buy or lease your new car?

More than nine out of every 10 buyers take out some form of finance when buying a new car in the UK. Personal Contract Purchase (PCP) and Hire Purchase (HP) have long been the mainstays of new-car finance on the UK market but an increasing number of buyers are now turning to leasing, otherwise known as Personal Contract Hire (PCH) to get behind the wheel of a new car. The question is, should you buy or lease your next car?

The most common form of car leasing differs from PCP car finance in one key area: rather than offering you the chance to buy the car at the end of the term or use any built-up equity to start a new finance deal on a new car, PCH customers must hand the car back at the end of the contract. With a car lease deal, there is no option to own the car.

Unlike with a PCP deal, PCH customers are locked into the leasing contract, with no legal right to leave it ahead of time. It is possible to arrange early termination of a lease deal with the lender but there are likely to be financial penalties for doing so. For this reason, it is important to ensure that leasing a vehicle suits your needs before signing on the dotted line.

Although PCH won’t be right for everyone, one look at the savings offered by these leasing deals gives a good indication of what could be driving people to make the switch. If your main priority is low monthly payments, leasing can look very attractive.

How does car leasing work?

A car leasing deal is structured in a familiar car finance fashion. You will sign a contract which will usually require you to make an upfront deposit payment followed by fixed monthly payments across the term of the contract. At the end of the lease term, the vehicle will be returned to the dealer, where it will usually be sold on to someone else.

In a sense, car leasing works on the same principle a PCP finance. They are both residual-value products. With PCP, you borrow the cost of a car’s estimated depreciation over an agreed term. The amount a car is predicted to be worth at the end of a PCP deal is known as its guaranteed minimum future value (GMFV), and the difference between the car’s current value and the GMFV is used to calculate the monthly payments. 

A typical leasing scenario would be that a car costs £20,000. After three years, data suggests that, with the agreed mileage covered, it will be worth £10,000. The lender doesn’t set the GMFV at £10,000, it is more likely to go for something like £8,500 to give a buffer for changes in the car’s predicted market value. This process determines what the monthly payments on the deal are. 

What are the advantages of leasing a car?

A key advantage of leasing a car is that the monthly payments tend to be lower compared to those for other forms of finance. This is because you’re effectively renting the car from the lender for the duration of the deal. Unlike PCP, you're not building up any equity in the car inorder to take ownership of it at the end of the deal.

Because you won’t have the option to buy the car outright at the end of the agreement, you won’t need to worry about the prospect of taking ownership of a depreciating asset in a few years time. All kinds of costs can be built into the leasing deal as well. The usual routine maintenance and taxes will be built into the agreement but you can even get leasing deals with insurance included so there really is just a single payment each month for all your motoring costs.

Leasing can also be arranged over a variety of different time frames. Agreements typically last for two or three years as you would expect with other kinds of car finance but short-term car leasing deals are also available which can get you a car for a matter of months.  

In short, car leasing is a great option if you like to swap your car every 2-3 years for a new one. If you like the sound of minimal maintenance costs, lower monthly payments than typical finance options, and don’t mind never actually owning the car outright, then leasing could be for you.

What are the disadvantages of leasing a car?

There are drawbacks to car leasing, however. Building equity is a key advantage that PCP deals offer over leasing deals. You won’t be able to make use of any potential equity with a PCH lease deal when it comes to the end of the agreement. The equity built up over the course of a PCP deal can be put towards the deposit on a new car at the end of the contract or can allow you to own the car after paying the final ‘balloon payment’.

Because you don’t build any equity with a lease deal, if you end up having paid off more than the car has depreciated over the course of the contract, that money is gone – no ifs, no buts. It just means more profit for the dealer or lender when selling the car to a new owner. 

As we’ve already established, you’ll never actually own the car outright with a leasing deal but that doesn’t mean you don;t have to look after it. You can incur charges when you hand back your leased vehicle if you have exceeded the mileage limit on the contract or if it is in poor condition. It’s always worth reading the small print of any finance agreement carefully and checking for potential fees and charges before you sign.

You can lease used cars but the majority of leasing agreements are on brand new vehicles with a full manufacturer’s warranty. It’s important for anyone leasing a used car or seeking to extend a lease deal with their lender to be aware of when the warranty expires. Once there’s no manufacturer’s warranty on a car, it’s much more likely that you could be landed with bills if things go wrong. 

In summary, if you like owning your car outright or having the option to buy the car when a finance deal is concluded leasing may not be for you. If you prefer to keep your cars for a long time or worry about mileage limits, it’s probably best to avoid leasing a car and choose a finance deal that better suits your needs.

What about bank loans and hire purchase?

Personal bank loans, and hire purchase agreements – where your monthly payments pay off the car fully, with no optional final payment to make at the end – represent a small section of the new-car finance landscape. But a meaningful number of people still choose these routes.

There are still a significant number of people who want to own the car, and if that’s important to you, you may well decide to take out an unsecured loan so you have legal title to the car.

If you can afford half the car already, a bank loan may be suitable but it has become a less popular product over the past 30 years. Essentially, if you go for a secured lending product like HP or PCP, it comes with a lot more consumer protections. There’s lower risk with a secured product, so generally speaking, the lender will be able to offer you a lower interest rate, because the security of the car means there’s lower risk.

Still unsure if leasing is right for you? Read our full guide on PCP (Personal Contract Purchase) car deals explained