Ready for a fresh set of wheels? If a car is top of your wish list, now’s the perfect time to start weighing up your options.
If you don’t want to buy a car outright – or don’t have the cash saved up just yet – the big decision to make next is to choose whether you go for car finance or leasing.
There are pros and cons to both; car finance can help you become the legal owner of your new pride and joy and split the cost into affordable monthly payments.
But, if you’re a real petrol head and love driving a brand-new model equipped with the latest tech every two years, leasing might be a better fit.
It all depends on your personal priorities and financial circumstances.
Not sure which way to go? Read on as we compare car finance vs leasing.
Got a specific question? Why not jump to:
The big difference between car finance and leasing is car ownership.
With car finance, you can eventually become your car’s legal owner. Whether you choose hire purchase (HP), personal contract purchase (PCP), or a personal loan, once you’ve made all your repayments (plus the one-off balloon payment in a PCP or the Option to Purchase fee for a HP agreement), the car could be all yours!
Leasing rarely ends with you becoming the proud owner of a new set of wheels. While buying the car can sometimes be an option if you’ve really fallen in love with it during your lease, in most cases, you’ll simply hand the car back to the lender and walk away at the end of your agreement.
Car finance is an agreement you’ll make with a lender to borrow money so you can buy a new or used car and spread the cost over a set period.
Keep in mind that eligibility criteria will apply and not every lender will agree to lend to every borrower. They each take different factors into account including your credit score, payment history, affordability, the amount you want to borrow, and your preferred loan term.
If you’re approved for finance, the next step is usually to put down a deposit – around 10% of the car’s purchase price is standard.
No savings pot? No problem! No deposit loans are available but will most likely come with a larger interest rate attached to them.
Most car finance agreements will last between one and six years and you’ll make a fixed payment each month including interest.
Depending on the type of finance you have, you might also need to agree an annual mileage limit and face extra charges if you exceed this or if you return the car with damage beyond fair wear and tear.
Hire Purchase is one of the most popular ways to finance a car purchase. You’ll
typically put down a deposit upfront and then pay back the loan in fixed
monthly repayments for between one and six years:
Unlike HP, Personal Contract Purchase gives you options at the end of the agreement. You’ll pay a deposit upfront and then make fixed monthly repayments throughout the loan term, but PCP doesn’t have to lead to car ownership:
Leasing – also known as Personal Contract Hire or PCH – is a lot like a long-term car rental.
Your lease will usually last between one and four years and you’ll pay a fixed monthly payment throughout this time. However, unlike car finance, you won’t usually have the option to become the car’s legal owner when the lease ends.
If you’ve fallen hard for your leased vehicle and can’t bear the thought of letting it go, some lease companies will let you buy it at the end of your agreement. But there are no guarantees and most leases end with you handing the car back and walking away.
Like HP and PCP, you’ll probably have to put down a deposit upfront. The exact amount will depend on your agreement, but you might be asked to pay three, six, or even nine months’ worth of lease payments in advance.
Terms and conditions will also apply. Most leases come with an annual mileage limit (and penalty charges if you go over it) and you’ll need to keep the car in good condition to avoid extra costs.
The big difference between car finance and leasing is that one can lead to car ownership and the other won’t, but that’s not the only thing that sets these types of finance apart:
Leases usually come with an annual mileage limit, but with HP loans, you can drive as far as you like.
As you’ll be handing the car back at the end of your lease, you’ll need to keep it in good condition. With PCP, this only becomes an issue if you decide to hand your car back to the lender or use any available equity as a deposit in a new deal.
Car finance normally leads to car ownership, which means any loss of value (depreciation) could affect the price you can sell it for in the future. With a lease, you don’t have to worry.
If car finance sounds like it might be the right way forward for you, you might want to consider these pros and cons before you make your final decision:
If you’re tempted to lease a car instead of buying one on finance, here are a few advantages and disadvantages to help you make up your mind:
Personal loans differ from other forms of finance as they aren’t secured against the car. Instead, you’ll become the car’s legal owner as soon as you use the loan to pay the dealership or private seller.
If you have a pot of savings to draw from, you might be able to afford to buy the car outright in cash. You’ll be the car’s legal owner as soon as you hand over the money or make a bank transfer to pay the seller.
While buying a car with a credit card is more unusual, it is possible. If you have a card with a 0% interest rate and a high enough credit limit, you might be able to make regular monthly payments during the interest-free period to spread the cost of buying a car without facing extra charges.
When it comes to choosing between car finance and leasing, there’s no right or wrong answer; the best option for you will always be the one that matches your personal priorities, needs, and budget.