Let’s face it, with so many options available, car finance can be confusing.
There are so many decisions to make; should you choose a hire purchase loan, a PCP agreement, a lease or even buy a car outright?
The right option for you is always dependent on your individual circumstances. The type of car you want to drive, how you want to drive it, your lifestyle and your financial situation can all determine whether a car finance deal will work for you or not.
Hire purchase (HP) and leasing are two of the most popular finance options available. And if you’re struggling to choose between them, our quick guide could help!
What is hire purchase?
Hire Purchase or HP Car Finance is a type of finance that’s secured against the vehicle. You’ll essentially be hiring the car during the agreement but, once you’ve made all the repayments and paid the ‘Option to Purchase’ fee, it’ll be all yours!
As you’ll own the car at the end of the agreement, monthly payments can be higher than other finance options but there are typically fewer restrictions on things like mileage to worry about.
What is leasing?
With leasing or personal contract hire (PCH), you’ll never own the car. Instead, you’ll pay a fixed monthly payment throughout your lease and, when the term ends, simply hand the car back.
This means your payments might be lower than they would with HP but you will have to agree to a set annual mileage limit and keep the car in good condition to avoid extra charges.
What are the pros and cons?
Hire Purchase is one of the most popular types of car finance, especially if owning the car is important to you.
Pros of HP Car Finance:
- You’ll own the car after you finish making all the repayments
- There are usually no mileage restrictions
- You might need to pay an Option to Purchase fee but there’s no big balloon payment
- Agreements can last anything from one to seven years
Cons of HP Car Finance:
- Your monthly payments could be higher than other loan options
- You can’t sell or modify the car during your agreement without lender permission
- You won’t own the car until you’ve made all the repayments
- The future value of your car isn’t guaranteed
If car ownership isn’t your top priority, leasing might be a good option for you.
Pros of leasing:
- You could change car every few years
- Newer cars might mean access to the latest tech and equipment upgrades
- Your monthly payments will likely be lower than they would be with HP
Cons of leasing:
- You will need to commit to an annual mileage limit
- You’ll never own the car you drive
- It’s often only available on new cars
Which car finance option is right for me?
Hire Purchase and Leasing are very different and offer a range of pros and cons for drivers. But when it comes to choosing the car finance option that’s right for you, there are a few factors that you should consider.
The first is whether car ownership is important to you. Just like buying a house or choosing to rent; car ownership is a personal decision and only you can say whether it matters or not.
Next, consider your financial circumstances. If you have a decent deposit saved and enough disposable income to cover higher monthly repayments, then hire purchase might be a good option for you. However, if you don’t have a deposit available and would prefer lower monthly payments, then leasing could be a more cost-effective choice.
Thirdly, it’s all about your lifestyle and how you use your car. Are you someone who commutes a long distance every day and spends hours behind the wheel? That could be incompatible with a lease that has a restrictive mileage limit. But, if you’re someone who loves the latest tech and tends to drive shorter distances, being able to drive a new car every few years could be too tempting to resist.
What other factors should you keep in mind?
Mileage is one of the biggest differences between leasing and hire purchase. With HP, you typically won’t have to worry about mileage restrictions; you can drive as much or as little as you like! If you travel for work, love taking epic road trips, or live somewhere with limited public transport, having no restrictions means you can jump in the car whenever you feel like it.
If you choose to lease instead, you’ll need to agree to a fixed annual mileage and may have to pay a penalty if you exceed that limit. That could mean you have to be more considered about driving and – if you need a high annual mileage limit – this could increase your monthly costs.
All cars lose value over time. The rate at which they depreciate depends on a range of factors including the car make and model, condition, and the way it’s driven. This isn’t something you need to worry about when you lease, you never own the car and can just hand it back at the end of your agreement.
However, if you have an HP deal, you will own the car and it will be worth less than the amount you paid at the end of the agreement. This may be a problem if you find yourself in negative equity – when your car is worth less than your finance – and you need to sell it quickly. But if you’re planning to keep the car for a while and are happy to accept it’ll lose value, then this might not bother you.
Leasing is usually only an option for new cars. And new cars mean new tech: the latest SavNav, driver assist features, entertainment touchscreens, and security features might all be included. New cars are also less likely to breakdown or need urgent repairs, which could be one less headache to worry about.