Hire Purchase vs leasing

When comparing Hire Purchase vs leasing, the main difference is what happens at the end of your agreement. With Hire Purchase (HP), you split the full cost of the car over an agreed term, and own it at the end. With leasing, you only rent the car for a set amount of time before handing it back.

You might prefer HP finance if you want to own your car but pay for it over manageable monthly payments. Or, leasing might be preferable if you like to change your car often and drive newer models. 

This guide outlines all the differences between Hire Purchase and leasing, including how both work and a side by side comparison to help you make your decision.

What's the difference between Hire Purchase and leasing?

The key difference between Hire Purchase and leasing is that with HP, you pay monthly to own the car at the end. With leasing, you never own the car. You pay monthly to use it and hand it back at the end. 

There are pros and cons to both. Monthly payments are usually higher with HP because you’re paying off the total price of the car, plus interest. Leasing often has lower monthly payments because you’re only covering the depreciation (loss of value) of the car while you’re driving it. 

However, leasing often has strict mileage caps and potential damage fees when you hand the car back, while HP has neither because you’ll own the car at the end.

Your choice also affects who takes the risk if the car loses value. With leasing, the finance company takes on this depreciation risk because it owns the car. With HP, depreciation is something to be mindful of when choosing your car. The car will become yours, so any loss of value may impact you once you become the owner and may want to sell it down the line.

How does Hire Purchase work?

With Hire Purchase, you spread the cost of a car across a set period, with the aim of owning it at the end. Here’s how the process works:

1. Pay an optional deposit: Typically, a deposit can be 10%. It’s optional, but paying one can reduce the amount you need to borrow. 

2. Make your monthly payments: You make fixed monthly payments throughout the agreement. These cover the amount borrowed, plus interest.

3. Pay the option-to-purchase fee: Once you’ve made all your monthly payments, you’ll usually need to pay a small option-to-purchase fee. After this is paid, you own the car.

While you’re working towards car ownership, the finance company owns the car until you’ve made all the payments and paid the option-to-purchase fee. 

You need to look after the car until you're the legal owner. But, unlike leasing, HP doesn't come with annual mileage limits or strict usage restrictions that can catch people out and end in extra charges. This may make it more appealing for some people weighing up a car lease vs Hire Purchase agreement. 

How does car leasing work?

With leasing – also known as Personal Contract Hire (PCH) – you pay to use a car for a set period. At the end of the agreement, you have to return the car to the finance provider. A typical PCH agreement lasts around two to four years. 

When you take out a lease, you make an initial rental payment upfront which typically covers the first three to six months of your lease. You then make fixed monthly payments for the rest of the agreement.

You also have to agree to an annual mileage cap, which is usually 8,000–15,000 miles. If you go over this, you’ll have to pay a fee. Similarly, the car can’t have damage beyond what’s considered “fair wear and tear” when you hand it back, or you’ll be charged. 

Unlike HP and PCP finance options, you don’t have the option to own the car at the end with leasing. With HP, you pay towards car ownership. With PCP, you have the option to buy the car at the end of the agreement by making a final balloon payment. Leasing, however, doesn’t include a purchase option under a standard PCH agreement. 

It’s important to think about this when deciding between a lease or Hire Purchase agreement, or whether you’d prefer a more flexible ownership option like PCP that lets you defer the decision. You can learn more about this in our guide to the difference between leasing and car finance.

Hire purchase vs leasing: side-by-side comparison

Early exit costs

Ending either agreement early can be costly. Both may include early termination charges. With a lease, you may have to pay a large part of the remaining payments. With HP, you can ask for an early settlement fee from your lender, which is a lump-sum amount you need to pay to clear your car finance agreement in full.

With HP, you may also be able to opt for Voluntary Termination (VT). With VT, you can hand the car back if you’ve paid more than half of the full amount owed, or can pay up to that threshold in a lump sum. Be aware though that you then may need to pay wear and tear charges when you hand the car back.

Credit score impact on both products

Both HP and leasing contracts involve a credit check, and your credit history can affect the rates and terms you're offered with both. A high credit score may mean you have access to lower interest rates and more favourable loan terms. A lower credit score could mean less favourable rates and you may need to provide a larger deposit. 

At Car Finance 247, we work with lenders who specialise in bad credit car finance. They look at more than just your credit score when assessing your application, and factor in your current finances and general affordability too. Credit is subject to status.

Depreciation

With HP, you take on the risk of the car losing value, because you will own the car at the end. If it depreciates more than expected, you could end up with negative equity or get less for it if you sell it. The car you choose matters, because depreciation varies between vehicles, with some brands and models tending to hold their value better than others.

With a lease, you don’t run this risk. Because you hand the car back, the risk falls to the finance company. This can be useful if you’re concerned about how quickly a vehicle might lose value.

Which is right for you: Hire Purchase or leasing?

Choosing between a lease or Hire Purchase ultimately comes down to what you want from your car and how you plan to use it. Here are some things you may want to consider when deciding between the two.

Choose HP if:

• You want to own the car outright at the end

• You drive high mileages and don’t want limitations

• You want freedom to modify or sell the car eventually

• You want to stop making payments after your agreed loan term

Choose leasing if:

• You want the lower monthly payments

• You prefer change and driving a new car every few years

• You have a predictable annual mileage that doesn’t vary

• You're a VAT-registered business and may be able to reclaim some of the VAT

When you're deciding between Hire Purchase vs leasing, be sure to compare quotes based on the same terms and mileage figures to get a fair comparison. As well as the monthly payments, remember to look at the total cost of each agreement and for any additional fees at the end.

If Hire Purchase fees like the better fit for you, you can explore your HP finance options with Car Finance 247.

The takeaway

There’s no right or wrong when it comes to Hire Purchase vs leasing; only what your priorities are and what you want from your loan. For some people, working towards owning the car and not having any mileage limitations makes the most sense. But for others, driving a new model every couple of years and lower monthly payments is more appealing. 

When you make your decision, think about how long you want to keep the car, how much you drive and whether owning the car at the end is important to you. Remember to think about the long and short term when weighing up your decision. Always compare the total cost over the full term, and not just the monthly payments.