Lease or buy a car: which is best for you
When it comes to getting your new car, you have a few clear options in terms of how to pay for it. Two of the most common car finance options are:
- Buying: You either pay in full or use a finance deal to pay over a set period
- Leasing: You pay a set amount per month to use the vehicle. It’s sometimes referred to as PCH or Personal Contract Hire.
So, the question is when shopping for cars – is it better to buy or lease a car? What's the difference between car leasing or buying? And which is better for you?
What is leasing?
When you lease a vehicle, you're paying a certain amount of money every month for the purposes of using that vehicle. The process of leasing, instead of buying a car, involves:
- Choosing your vehicle and specifying its options
- Tailoring your contract length and features
- Putting down a deposit for leasing
- Paying monthly payments over the term of your contract
- When that contract ends, returning the car back to the dealer
You then have the option of arranging another lease deal on a new vehicle, or, if you like the vehicle you have, renegotiating your lease. This can mean lower monthly payments as the vehicle will be older and the value depreciated in the time you have had the use of it.
A benefit of leasing is that deals come in all shapes and sizes that can be tailored to your needs.
- Minimum monthly payments - You can just get a quote purely for the right to drive the car.
- Customised deals - If you're willing to spend a little more, you can customise your deal to include certain maintenance options and servicing packages.
The pros and cons of leasing
The pros of leasing are that it allows you to usually spend less per month than if you were to buy. The cons are that with leasing you have no option to actually own the car.
Leasing a car: advantages
- Stress free - One clear advantage of leasing is that it can offer a far more stress-free approach to running a vehicle. This is because many lease deals offer maintenance and servicing options. Some will even cover ongoing consumables like brakes and tyres. This means it's easy to break down your cost of ownership into a simple and reliable monthly figure.
- Cheaper to lease - Another benefit of leasing is that it can be cheaper to lease instead of buying, allowing you to look at newer and more premium cars. Cars are getting more and more expensive, which makes leasing a compelling prospect for many.
Leasing a car: Disadvantages
- No ownership - 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.
- Usage limited - Another disadvantage is that car 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: the options
There are two main ways to buy a car instead of leasing – purchase it outright or through car finance.
The majority of people buy a car 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.
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 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 also don't need to pay a deposit with many PCP deals, but this means 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.
Buying a car: balloon payments
A key difference between buying and leasing is that PCP deals give you the option to buy the car at the end. You do this by paying a "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.
Pros and cons of buying a car with PCP
The main pros of buying are that you own the car. The downsides are that monthly payments when buying through finance can be more than leasing.
Buying a car with PCP: advantages
- Affordable way to buy - 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.
- Shielded from depreciation - 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.
Buying a car with PCP: disadvantages
- Reduce usage - 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.
- Balloon payments - 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 buying a car with cash?
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.
It might also be easier to buy a car if you have bad credit than if you try to lease as you don’t need to have a credit check as long as you bank transfer clears.
Car leasing vs buying? The decision
There is no right answer - every method has its advantages and disadvantages to consider. When deciding whether it’s better to buy or lease a car, 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.