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Lease vs Finance

heycar editorial team

Written by

heycar editorial team

lease agreement signed
  • We explain the differences between leasing and PCPs 
  • Find out which is the most suitable for you
  • What hidden costs to look out for

Buying a new car is brilliant. Paying for it isn’t so great.

Luckily there are so many ways to finance your new vehicle. The most popular method of buying new cars on finance is the Personal Contract Purchase (PCP). However, leasing is becoming ever more popular. Here we ask the question: What is PCP, what is lease, and which is best?

What is a lease?

For a long time, leasing cars was only open to companies. However, it’s now available to private buyers and usually goes by the name of Personal Contract Hire (PCH). A lease (or PCH) is where you put down a small deposit and hire the car for a longer period of time, often around three or four years. You pay a monthly fee, then when the agreed term is up, you simply hand the car back. There is no option to buy the car.

What is PCP?

A Personal Contract Purchase (PCP) is a highly flexible way to finance a new car. You put down a deposit, then agree monthly payments. These can be very affordable because they usually just cover the depreciation or the value lost over the period of the deal. At the end of the term, you have three choices. You can hand the car back with nothing more to pay. You might want to use any equity remaining in the car to put towards the PCP deposit on a replacement. Alternatively, you can pay what’s called the ‘balloon payment’ (sometimes known as Guaranteed Minimum Future Value) and own the car. With a lease, only the first of those three options is open to you.

Is it cheaper to lease or buy a car?

One of the big benefits of leasing a car is that it usually works out cheaper than PCP. This is because with a PCP, monthly payments are made slightly higher so you slowly accumulate equity in the car. This is when at the end of the term, the total of your monthly payments comes to more than the Guaranteed Minimum Future Value. You can use this excess as a deposit towards a replacement model. When you lease, you don’t have to build this equity, making monthly payments lower.

Are there other benefits to leasing?

As the finance company offering the lease will always own the car, it’s in the firm’s interest to maintain it. As a result, lease deals frequently include servicing and maintenance costs, plus breakdown assistance. The finance company will pay the car tax too.

In addition, the deposit you put down at the start of a lease deal is often smaller than with a PCP. This lower overall cost means you can often opt for a newer, nicer car.

PCP or lease?

The big benefit of lease compared to PCP appears to be its lower cost. Leasing companies can charge less for cars because they often buy in large numbers with large discounts from the manufacturers. They can then pass these savings onto their customers.

But leasing doesn’t always work out cheaper in the long run. For car companies, attracting new customers is expensive; it’s much cheaper to keep existing ones. And PCP is a much more reliable way of doing that. Many car companies offer very attractive PCP rates because doing so makes it easier for them to retain you as a customer.

Cost to lease a car

A lower cost isn’t always a reason to choose something. And there are some prices to pay for choosing a lease over a PCP. If you decide to cancel a lease before the term is up, the penalty is likely to be higher than if you have to cancel a PCP. With a lease you may have to pay all the costs in full, even if you return the car early. With a PCP, if you’ve paid more than half the total balance due, you can hand the car back early and simply walk away.

And when you come to the end of the term, there may be tough penalties if you exceed the agreed mileage limit or if the car has suffered wear and tear over its time. Although these also apply with a PCP, you can often get around them by part exchanging your car when you buy a new one.

Don’t forget the hidden cost

Depreciation, or the amount of its value a car loses over time, is often referred to as the hidden cost of car ownership. It’s worth working out whether the car you’re thinking of buying depreciates heavily or not. If it does, leasing is the better option. If it holds its value well, a PCP with the option to eventually buy the car probably makes more sense.

Your flexible friend

None of us knows what’s around the corner, and the big advantage PCP has over leasing is that it’s more flexible. If your circumstances change or you love your car so much you want to hang onto it, PCP is the one for you.

The real downside of a lease is that when the period ends you must hand the car back. You have no option to own it; you must start all over again. In reality, this means you’ll have to find the deposit for a replacement. And if you decide you don’t like leasing, you’ll need to buy a suitable used car outright.x


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