Trying to figure out whether to lease or finance a car can be confusing. Both options have their benefits, but the right choice depends on your budget, whether you like to switch cars often, and whether you want to own the car eventually.
The difference between leasing and financing a car mainly comes down to ownership. With car finance, you make regular monthly payments towards the vehicle, and what happens at the end depends on the type of agreement you choose. With HP, you keep the car at the end. With PCP finance, you can pay the final balloon payment to own the car, part exchange it for another vehicle, or return it.
But with leasing, you don’t have the option to own the vehicle. You have to hand the car back once the leasing contract ends.
So which is best for you? To help you make an informed decision, we’ve broken down the difference between leasing and financing and the pros and cons of both to weigh up.
What’s the difference between leasing and financing a car?
There are a few differences between financing a car and leasing. But the biggest difference is who owns the car at the end of the loan term.
With leasing, you’re essentially renting a car for a few years. Leasing is also known as Personal Contract Hire (PCH). You make monthly payments that cover the car’s depreciation (how much value it loses while you’re using it) plus some interest. When your lease is up, you hand the car back.
When you finance a car, you take out a loan to buy the car. Your monthly payments go towards paying off the loan and interest. Once you’ve paid it off, the car is yours to keep, sell, or trade in, depending on the type of finance you choose.
It’s a good idea to understand this difference between leasing and financing a car when weighing up which is best for you. Remember, there is no right and wrong; just what you want out of the agreement.
Car financing explained
What is car financing?
Car finance is when you borrow money for a car and spread the cost over fixed monthly payments. Depending on the type of finance agreement you choose, you can own the car, hand it back or part exchange it.
Financing usually comes in two main types:
Hire Purchase (HP): You may or may not pay a deposit and then make fixed monthly payments. Once you’ve made all the payments, the car is yours.
Personal Contract Purchase (PCP): You may or may not pay a deposit, followed by typically lower monthly payments compared to HP because you’re mostly covering the car’s depreciation. At the end of the term, you have options: hand the car back, pay a final lump sum (often called a balloon payment) to own it, or trade it in for a new deal.
Advantages of car financing
You could own the car: In a HP deal, you’ll own the car at the end of your agreement. In a PCP deal, you own the car if you decide to pay the optional balloon payment. If you choose not to pay the balloon payment, you will need to return the car.
Mileage flexibility: HP Finance agreements can allow for more mileage options, as there are no mileage restrictions. In contrast, you may find that PCP or leasing often have limits and penalties for going over.
Resale value: Once you own the car, you could sell it and get some of your money back.
Disadvantages of car financing
Higher monthly payments: Car finance agreements often have higher monthly payments compared to leasing.
Depreciation: When you finance a car, its value decreases over time due to depreciation. This means that when you try to sell or trade the car, you'll likely receive less money than you originally paid for it.
Long-term commitment: Financing a car typically involves a longer-term commitment, whereas leasing can offer shorter contracts. Some people are put off by this.
Only you can decide if the benefits of car leasing outweigh the cons for you; it comes down to your priorities and finances. Just remember to factor in your short and long-term goals before entering into any agreement.
We recommend seeking independent financial advice if you're unsure about which option suits your personal financial situation.
Car leasing explained
What is car leasing?
Car leasing is like a long-term rental agreement where you pay a set monthly amount to use a brand-new car for an agreed term. Once the contract ends, you return the vehicle to the leasing company instead of owning it.
Advantages of car leasing
Lower monthly payments: Since you’re only paying for how much the car's value drops while you’re using it, your payments are usually lower than if you financed the same car. However, monthly payments can vary based on the car model, length of the lease and your own financial situation.
Switch more often: If you like swapping your car every few years, leasing might be better for you.
Less maintenance hassle: Leases are usually short enough to keep you covered under the manufacturer’s warranty, which could save you money on repairs.
Easy end point: When your lease is up, you just return the car, and there’s no need to worry about selling it on if that feels like a hassle to you.
Disadvantages of car leasing
You won’t own the car: One big downside is that you’re paying for a car you’ll never own, so you’re not building any equity.
Mileage limits: Most leases have strict mileage limits, and if you go over these, you’ll have to pay a fee.
Wear and tear changes: You have to be very careful with a leased car or you might get hit with charges for wear and tear when you hand it back.
Should I finance or lease a car?
So, what is better – leasing or financing a car? Leasing could be right for you if:
You want lower monthly payments
You want to switch your car more regularly
You don’t mind not owning the vehicle
You don’t mind agreeing to mileage limits
If you get bored easily and like to switch up your car, leasing might be worth it because the loan terms are typically shorter, which may allow you to change cars more regularly. It’s also usually cheaper month to month, so it could be worth it financially in the short term.
Financing could be right for you if:
You’re planning to keep the car long term
You want the option to own or sell the car at the end
You want to build personal equity over time
You’re happy to stick to mileage and condition terms (PCP only)
If you want more ownership flexibility at the end of your contract, a PCP agreement might be a better option for you over leasing. You can choose if you want to keep, sell or part exchange the car. If you know you want to own the car and build some personal equity, HP could be a better option for you.
Here’s a side-by-side comparison of leasing and financing a car to help you decide:
Leasing a car |
Financing a car |
|
|---|---|---|
Ownership |
You don’t own the car and must return it at the end. |
With HP, you own the car at the end. With PCP, you have the choice to, if you pay the balloon payment. |
Monthly payments |
Usually lower than car finance because you pay for the depreciation of the vehicle, plus interest. |
Typically higher than leasing, depending on your finance type. PCP payments are usually lower because they cover the depreciation. But HP is higher because payments cover the whole cost of the car. Both also include interest. |
Upfront cost |
May include an initial payment, fees, taxes, and registration costs. |
May include a deposit, but no deposit car finance options could also be available. |
End of agreement |
Return the car. |
With HP, you keep the car. With PCP, you can pay the balloon payment to keep the car, sell it, or part exchange it. |
Mileage limits |
Mileage restrictions usually apply. |
Mileage limits with PCP, no mileage limits with HP. |
Customisation |
Not allowed as you will be giving the car back. |
You can modify the car once you’ve made the final payment and it’s yours. |
Maintenance |
Often covered during the lease term. |
Your responsibility, especially after the warranty ends. |
Wear and tear |
You may be charged if the car is returned with damage beyond fair wear and tear. |
Not an issue if you keep the car on a PCP or HP deal. But if you return a car at the end of a PCP agreement, you may be charged for damage beyond fair wear and tear. |
The takeaway
Like everything, there are pros and cons to leasing and financing a car. The choice ultimately comes down to your lifestyle and budget. Leasing could be a good option if you enjoy driving new cars, but it comes with mileage limits, and you won't own the car at the end of your agreement.
On the flip side, financing costs more upfront but gives you the benefit of ownership at the end and may even save you money in the long run.
By carefully weighing up the benefits of car leasing versus the downsides, you can make the choice that’s right for you. If you decide car finance is the right option for you, we’re here to try and find you find the best deal for your circumstances. Get a obligation-free quote now or give us a call!
Disclaimer: It's important to consider all terms and conditions before entering into any agreement. Monthly payments and the total cost of financing or leasing can vary depending on factors like credit history, vehicle model, and length of the agreement. Ensure you fully understand any additional costs, such as early termination fees, excess mileage charges, and maintenance costs before making a decision.