Is It Better to Buy or Lease a Car?
When it comes to buying your new car, you have a few clear options. The first is to actually buy it, and you have a few different choices to make there. The second is to lease it. What's the difference between those choices and which is better?
What do you need to know about leasing?
We'll start with leasing, as it's a somewhat more straightforward prospect. When you lease a vehicle, you're paying a certain amount of money every month for the purposes of using that vehicle. The key difference between leasing (usually called PCH or Personal Contract Hire) and buying, is that with leasing you have no option to actually own the car. You put down a deposit, pay your monthly payments over the term of your contract, and then when that contract ends the car goes back to the dealer. You will then have the option of arranging another lease deal on a new vehicle. Or, if you like the vehicle you have, you can arrange to renegotiate your lease - this will likely mean lower monthly payments, due to the vehicle being older and having depreciated in the time you have had the use of it. PCH deals come in all shapes and sizes. If you want the minimum monthly payments you can just get a quote purely for the right to drive the car. If you're willing to spend a little more, however, you can generally customise your deal to include certain maintenance options and servicing packages. Depending on the reliability of your car, it could end up saving you a great deal of money in the long run if you don't have to pay for visits to the garage yourself. So leasing, put simply, works like this:
- Choose your vehicle and specify its options
- Tailor, your contract length and included features
- Put down your deposit and drive away
- Make your monthly repayments for the length of the term
- When the term is up, take the car back to the dealer
The advantages and disadvantages of leasing
One clear advantage of leasing is that for many it offers a far more stress-free approach to running a vehicle. This is because many lease deals will offer generous maintenance and servicing options. Some will even cover ongoing consumables like brakes and tyres. That means it's easy to break down your cost of ownership into a simple and reliable monthly figure. Another benefit of leasing is that it can offer a more affordable path into much newer and more premium cars than you might otherwise be able to comfortably afford. Cars are getting more and more expensive, which makes leasing a compelling prospect for many.
The main disadvantage of leasing is that you never have the option to actually own the car you're paying for. You're making your payments for the ability to take the car home with you and use it through the length of the term - but you have no option to own it. Another disadvantage is that leasing will generally have some sort of ownership limits on the way you use the vehicle. For example, there will be a mileage cap on most lease deals, and you run the risk of being charged extra if you go over it.
Buying a car with finance
The majority of people, if they're looking for a new or nearly new car, will choose to buy it through Personal Contract Purchase (PCP), otherwise known as getting "finance". It's essentially a loan, specifically for the purposes of purchasing your car - the amount you borrow, however, is the difference between the car's current value and its expected value at the end of the proposed contract term. So if you finance a £30,000 car that'll be worth £12,000 by the end of a three year PCP deal, you're actually "financing" the difference - so it'd be a loan value of £18,000 rather than the full £30,000. PCP deals are like lease deals, in that they're generally very flexible depending on what you want. You can usually customise your monthly payments, either by lengthening your contract term or by increasing the size of the deposit you pay. You don't have to pay a deposit at all with many PCP deals if you don't want to, but it will mean you'll have higher monthly repayments. As with lease deals, you will also often be able to get added benefits to your PCP deal, including servicing and maintenance addons, but these will all be reflected in the price you pay.
Don't forget the balloon payment
PCP and lease deals follow the same structure for the most part. You choose your car, arrange the deal, pay a deposit, take the car away and pay monthly for the agreed-upon term. The key difference is that PCP deals give you the option to buy the car at the end. You do this by paying what is usually called the "balloon payment". This will be a final, usually quite large, amount of money that's paid to clear the remaining value of the car. If you want to pay it, you can make the car completely yours. If you don't want to pay it, the car will go back to the dealer as it would if it was a leased vehicle. You will be able to see your balloon payment amount when you're structuring your deal, so keep it in mind if you've got a view to keeping the car. You do have options for paying for it. You can pay it in a lump sum, or you can take out a new loan to cover it - but that will mean you still being in debt. Depending on the dealer you might be able to refinance the car over several more years, to the point it has depreciated so much your eventual balloon payment is more affordable.
Advantages and disadvantages of PCP
PCP has many of the same advantages as leasing, in as much as you have a more affordable path to driving newer and more luxurious or sporty cars. As with leasing, you're also somewhat shielded from depreciation if you choose to let the car go back to the dealer. This is because you're paying essentially to use the vehicle through the contract term, so its value going down won't mean much. It will become a factor, however, if you choose to buy the car in the end.
As with leasing a major disadvantage of PCP is that the nature of the contract can be quite restrictive in terms of the mileage you're able to cover with the vehicle. It's something you always have to bear in mind rather than if you owned the car outright. Another disadvantage is you need to overcome that balloon payment, which can be quite steep if you actually want to own the car.
What about cash?
The focus has been on leases and PCPs as these are the primary ways people buy new or nearly new cars. Cash is still popular when buying older used cars, but it's increasingly uncommon when it comes to buying new cars. In fact, there are many dealers who no longer accept cash over a certain amount - largely due to money laundering rules and regulations. If you want to pay the full amount by bank transfer, however, you still can do. This isn't very popular among new car buyers, however, primarily because a new car is a rapidly depreciating asset. Buying a car outright can make sense if you intend it to be a long-term investment, namely owning and driving the car for many years, but if you're going to replace it within just a few years you'll lose a considerable amount of money. It also requires a large amount of disposable income or savings to be able to buy outright.
So which is best for you?
The simple answer is that it's entirely up to you. There is no "best" way of buying a car, as every method has its advantages and disadvantages to consider. The only way to sensibly approach it is to find the car that best suits your needs, decide whether you want to ultimately own it or not, and then research the most affordable way for you to put yourself behind the wheel. Whatever you choose, you can tailor your deal to best suit your needs, budget, and lifestyle.