PCP vs Leasing: Which is Better?

When it comes to car finance, you have a range of options to choose from. And there’s no right or wrong choice; each finance agreement has pros and cons to consider when trying to decide which is the right one for you.
 
Personal Contract Purchase (PCP) and leasing or Personal Contract Hire (PCH) are both types of car finance that give you access to a car in return for monthly repayments. They both also allow you to hand the car back and walk away once your agreement ends.
 
But which is the best option for you? We’re here to help you make up your mind.

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What is PCP?

PCP spreads the cost of buying a new or used car, typically over a period of between two and four years. One of the biggest selling points of PCP is its flexibility - it gives you options at the end of your loan term.
 
When your PCP agreement ends you can:

  • Buy the car by paying the one-off balloon payment
  • Hand it back to the lender and walk away
  • Use any available positive as a deposit in a new finance agreement

Deposit

 
Most PCP deals will ask you to put a deposit down upfront. Approximately 10% of the car’s purchase price is usually considered a good deposit.

Monthly payments

You’ll then make fixed monthly payments throughout the loan term. These payments will be calculated so they cover the amount of value your car will lose in this time. That’s the difference between its current value and its estimated future value (its Guaranteed Minimum Future Value or GMFV). As you won’t be borrowing the full purchase price, repayments can be lower than other options like HP finance and personal loans.

Final optional balloon payment

If you’ve fallen in love with your car during the loan term and can’t imagine life without it, you can choose to buy it when your agreement ends. You’ll need to pay a one-off balloon payment though, which is usually equivalent to the GMFV.

Diagram displaying how PCP finance works

Pros and cons of PCP

Like any type of finance, there are advantages and disadvantages to PCP that may influence your decision:

What are the pros of PCP finance?

  • Your monthly payments can be lower than other types of finance
  • You have options at the end of your agreement
  • You might be able to afford a newer or higher spec car
  • You have the option to own the car at the end of your agreement

What are the cons of PCP finance?

  • You won’t become the car’s legal owner unless you pay the balloon payment
  • You’ll likely have to agree an annual mileage limit
  • You’ll face extra charges for any damage to the car beyond standard wear and tear
  • Your car can be repossessed if you don’t keep up with your repayments

What is car leasing?

Leasing – also known as Personal Contract Hire (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. Once the lease ends, you’ll simply hand the car back and walk away.
 
If you’ve found that your leased car is the perfect fit for your life, some lease companies will let you buy it at the end of your agreement, but this is never guaranteed.
 
You’ll probably need 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. Like PCP, 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 paying for the damage.

Diagram explaining how car leasing works

Pros and cons of leasing

If you’re tempted by the thought of leasing a car, here are a few advantages and disadvantages to keep in mind:

What are the pros of leasing?

  • Monthly payments can be lower than other types of finance
  • You could get behind the wheel of a newer car and can change cars more often
  • You don’t have to worry about depreciation

What are the cons of leasing?

  • You don’t own the car and will need to return it at the end of the lease
  • You’ll likely have to agree an annual mileage restriction
  • You’ll be tied into a contract and may be charged a penalty fee to end the lease early

More car finance guides

What is a balloon payment?

Balloon payment is the term used to describe the one-off payment due at the end of some car finance loans. It’s a key feature of PCP finance and is usually equivalent to the GMFV – the amount the lender thinks your car will be worth at the end of your agreement. In a PCP deal, you’ll need to pay the balloon payment (either outright or by refinancing) to become the car’s legal owner.

Is PCP or leasing better?

When choosing between PCP and leasing, the best option for you will depend on your personal preferences, needs, and circumstances.
 
Here are a few of the potential deal breakers:

Ownership

If you’ve always dreamed of being a car owner and enjoying the freedom that status represents, leasing might not be right for you. While some lease companies let you buy the car when your agreement ends, there are no guarantees. In most cases, you’ll need to hand the car back at the end of your lease term.
 
PCP gives you the option to buy the car and become its legal owner by paying the one-off balloon payment when your term ends. This means that, if you fall in love with your car and can’t bear to let it go, you can choose to pay (or refinance) the balloon payment and you won’t have to!

Budget

Both PCP and leasing can come with lower repayments than other types of finance like HP.
 
PCP is typically more expensive as leases aren’t designed to lead to car ownership and monthly payments are based purely on the value that the car will lose during your lease term. Keep in mind that leasing a car that depreciates quickly may cost you more each month than a car that is known to hold its value well over time.
 
PCP is based on the same thing, but due to the flexibility it provides, can be more expensive over the course of the loan term. There is also more interest to pay as this will be based on the car’s initial purchase price, not just its depreciation.

Flexibility

Leases usually have one ending: giving the car back. They’re an ideal choice for people who don’t want to worry about the commitment that can come with car ownership, who love having access to the latest models, and like changing their car up regularly. But if you do fall in love with your car, you might find yourself saying goodbye to it, no matter what.
 
PCP offers more flexibility. Like leasing, you can simply hand the car back at the end of the term if that’s the right choice for you. However, you can also buy it by paying the balloon payment to become its legal owner or use any available positive equity as a deposit in a new deal. Having the flexibility to change your mind two, three, or even four years after signing your agreement can be more tempting to those who aren’t sure what the future might hold for them and their new set of wheels.

Early termination

There are some key differences between PCP and leasing when it comes to early termination, but one important similarity: a 14 day cooling-off period. By law all finance agreements - including PCP and leasing - give you the option to cancel your agreement within 14 days of signing. Once you’ve cancelled your contract, you may need to return the car or find an alternative form of finance. 
 
With PCP, you have the right to voluntarily terminate your finance agreement under Section 99 of the Consumer Credit Act 1974. You just need to tell the lender you want to voluntarily terminate and return the car. It is important to note you will need to pay 50% of the total amount payable (including the balloon payment). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money. Extra charges might apply if the car is damaged beyond fair wear and tear.
 
Leases can be expensive to end early. You’ll be tied into a long-term contract and breaking that comes with fees that could be up to 50% of your remaining payments, as well as an early termination charge.
 
Both options will also charge you extra for any damage beyond fair wear and tear and for any miles that you’ve gone over your limit, so be sure to drive carefully and keep an eye on your mileage counter.

Disclaimer - Here at Carmoola we currently only offer Hire Purchase car finance agreements, subject to credit checks.

FAQs About PCP & Car Leasing

Is it better to own a car or have a PCP agreement?

It all depends on your personal preferences and current circumstances. Car ownership might be better than a PCP agreement if you plan to keep the same car for a long time and don’t want to worry about mileage restrictions.
 
On the other hand, a PCP agreement could be a better option if you like changing car regularly, don’t want to deal with selling or part-exchanging in the future, and tend to drive a similar number of miles each year.

Will my PCP agreement come with a mileage limit?

Most PCP agreements will ask you to agree a mileage limit that restricts the distance you can drive each year. If you go over this limit, you’ll likely be charged a set amount per extra mile.

What do I need to apply for PCP finance?

Different lenders can ask for different information when you apply for PCP finance, but most will ask you to provide:

  • Personal details – such as your name, date of birth, and marital status
  • Proof of income – usually three months’ bank statements or payslips
  • Proof of address – including a Council Tax statement or utility bill
  • Proof of identity – such as a passport or full UK driving licence

Do I need a credit check for PCP finance?

Yes, you’ll usually need to undergo a credit check for any type of finance, including PCP. Lenders will often carry out a soft credit check to assess your initial eligibility, followed by a hard credit check (which will be listed on your credit file). Be aware that having a lot of hard checks appear on your credit report in a short period of time can negatively impact your credit score.

Is insurance included in a car lease agreement?

No, car insurance is not typically included in a car lease.  It's your responsibility to secure separate insurance coverage for the leased vehicle throughout the lease term. This ensures the car is financially protected in case of an accident, theft, or other covered events.

Is road tax included in a car lease agreement?

In most car lease agreements, yes, road tax (also known as Vehicle Excise Duty or VED) is included in your monthly lease payment.2 This applies to the most common lease types:

Contract Hire (CH): Road tax is included for the entire lease term at the prevailing rate when you sign the agreement. The leasing company handles the road tax administration as they are the registered keeper of the vehicle. There's one caveat - if the government increases road tax during your lease, you might be responsible for the difference.

Personal Contract Hire (PCH): Similar to CH, road tax is usually included for the entire lease term at the initial rate. The leasing company is responsible for managing the road tax.
However, there can be some exceptions:

Operating Lease: For this less common lease type, road tax might only be included for the first year. You would then be responsible for renewing it for the remaining lease term.

Always double-check your specific lease agreement to confirm whether road tax is included and for what duration.