There are many ways to get behind the wheel of a new (or for that matter, used) car these days that don’t involve paying an entire sum upfront to purchase the vehicle.
For those who have the lump sum of cash available to them, purchasing their vehicle outright may still be the most attractive option. But not everyone has sufficient funds to buy a car in one go; others, meanwhile, may have enough money, but might be concerned about depreciation, or wish to exchange or upgrade their car at a certain point in the future.
If one of these scenarios describes you, you have good reason to think seriously about whether leasing your next vehicle may be a better choice than financing an outright purchase. But in determining the right route for you, you will need to educate yourself on the various differences between financing and leasing, and the associated implications.
First of all… what is car financing?
Car financing is essentially just an alternative way of buying a car to paying the entire sum upfront. It entails taking out a loan and then repaying that loan in monthly instalments over a set period of time – for example, five years, although repayment terms can also be shorter and longer than this.
Then, once that repayment term comes to an end, you will either be the outright owner of the car – as is the case with a hire purchase (HP) deal – or have the option to pay a final ‘balloon’ payment to own the vehicle.
The latter is what happens if you take out a personal contract purchase (PCP) arrangement; it means that if you decide at the end of the agreement that you don’t wish to own the car after all, you also have the option of returning or exchanging it.
Otherwise, both hire purchase and personal contract purchase agreements have a lot in common. They are both effectively loans secured against an asset – in this case, a car – and they both involve you making fixed monthly payments until the full price of the vehicle, plus the finance cost, is repaid.
Another option that you have with both of these types of car finance is paying a deposit, which will lower the amount you then need to pay each month. But it’s also perfectly possible to obtain car finance with zero deposit, which might be an attractive option for you if you don’t have enough funds in your bank account to pay a deposit right now.
OK – so how does leasing compare?
While car financing can be seen as the more ‘traditional’ route to driving a car for those who may not have the funds to purchase straight away, leasing is more of a recent ‘up and comer’.
Leasing does share a lot of characteristics with financing, however. It essentially involves paying a monthly fee to have access to a vehicle for a certain period of time – typically between one and five years. Once this period of time expires, provided that the buyer has complied with the terms of the leasing deal, they can simply return the car with nothing further to pay.
Contract hire is the most common type of car lease agreement – or ‘personal contract hire’, as it is known when a private individual, rather than a business, is leasing the vehicle.
It’s important to bear in mind, though, that a contract hire deal will come with a pre-agreed mileage limit. In the event of you exceeding this limit, you will be required to pay a fee, known as an excess mileage charge.
Leasing a car in the UK also means you will need to maintain the vehicle in a satisfactory condition, as outlined by the BVRLA Fair Wear & Tear Standard. The BVRLA is the UK trade body for businesses in the vehicle rental, leasing and fleet management industry, and you can ask for a copy of the Standard – which sets out what is considered to be ‘fair’ wear and tear – directly from your leasing company.
The right option for you will depend on your circumstances and needs
The various financing and leasing options out there naturally all have their various pros and cons. So, the path that serves you best will hinge on your individual circumstances and requirements.
With leasing basically being long-term car rental, you won’t have the option to buy the car at any point – once the term ends, you will need to give the car back. The car’s depreciation – the value that it effectively loses over time – may also be a factor in your decision to finance or lease.
But as we have also covered in this article, the differences between leasing and financing aren’t necessarily as great as one might initially think. A personal contract purchase deal, for instance, gives you the flexibility to exchange, return or own the car at the end of the repayment term, which may make it the best option for you if you’re undecided between leasing and financing.
Whatever you do, don’t rush into a decision you might end up regretting. Take your time, research, and contemplate what is likely to work best for your practical requirements, desired lifestyle and budget.