to lease or to buy, contract hire or hp…

How do I know if it’s cheaper to lease or buy?

A lot of factors influence whether it’s cheaper to buy or lease a car, such as the number of miles you drive and how well the car retains its value.

Generally, if a car has a good resale value then you’re better off buying it. After three years you’d own a valuable asset, whereas with a leased car you’d have nothing.

 

But if the car plummets in value then it’s probably cheaper to lease it, as you won’t be bearing the brunt of the depreciation.

Just don’t forget to factor in the deposit you pay as well as the monthly cost.

 

Leasing – Contract Hire

Predominantly, historically used in business but today taken advantage of by high percentage of personal consumers. You pay the monthly rental each month and you won’t have an option to purchase the car at the end of the term, you just give it back.

You usually have to pay a larger sum as the first payment and then lower fixed monthly payments for the rest of the term.

Pros:

  • Added extras – Leasing arrangements may include other costs, like servicing, tyres, tax and insurance.
  • Changes – As there’s no buyout option, changing vehicles is easier under a personal leasing arrangement.
  • Depreciation – The cost of the car’s depreciation is the leasing company’s problem.
  • Invariably you can seat yourself in a higher specification car than would be allowed cost wise if you were to hire purchase for example.

Cons:

  • No ownership – No matter how long you lease the car for, you won’t own it, so you’re pretty much just hiring the vehicle.
  • Fees – Mileage limits are imposed with penalties for exceeding it and there may also be fees for damage that goes above and beyond reasonable wear and tear.

 

Personal Contract Purchase (PCP)

A finance company buys the car, while you pay a deposit and fixed monthly instalments for a set time period, usually between one and four years.

Before the contract starts, the finance company gives the car a guaranteed final value (GFV), which you can pay at the end of your contract term – sometimes called a ‘balloon payment’ – to take full ownership of the car.

Alternatively, you can give the car back and use the value above the GFV (if any) towards the deposit for another car.

Pros:

  • Lower payments – You might end up paying less than other types of car finance, though this depends on the market.
  • Options – You have the opportunity to drive a new car every few years or choose to own the car outright at the end of the term.
  • Spread the cost – You can refinance the balloon payment to make it easier to pay off.
  • Paid deposit – Some car dealers are keen to make a sale, so might offer to pay all of the deposit, meaning you’d just have to pay the monthly payments.

Cons:

  • Know your limits – PCP contracts usually have a mileage limit and penalties apply if you exceed it.
  • Depreciation – By the time the term ends, you might’ve only paid off the car’s depreciation, so you may not have any equity in the car and might have to start from scratch on your next contract.
  • Fees – There may be fees imposed for any damage to the car, if it’s more than your standard wear and tear.

 

Hire purchase

You’ll have to pay a deposit of typically around 5-10%, and then pay fixed monthly instalments over an agreed term which covers the purchase price of the vehicle (minus the deposit) plus interest.

Pros:

  • Car ownership – At the end of the term, upon making the final payment, the vehicle is yours to keep.
  • Paid deposit – Some dealers will be eager to make a sale, so they’ll contribute to the deposit, or pay it for you.
  • Borrow more – Provided you meet the criteria, you may be able to borrow a larger sum of money than under a personal loan. However, it’s important to make sure you can make your repayments.

Cons:

  • Collateral – The finance company ‘buys’ the car meaning that you do not own the car until the loan plus interest has been repaid.  If you fail to keep up with the payments, the lender can repossess the car.
  • No sale – You are unable to sell the car until you’ve paid off the loan, but you can request an early settlement figure if you want to pay it off sooner.