Which is Better: Hire Purchase or Lease?
Between a hire purchase and a car lease, which one is the better choice for you? Hire purchase car finance might sound a bit more complicated than car leasing. Leasing a car is much like renting a car, just for a longer term. Some drivers lease cars without really exploring if a hire purchase deal is the better option for them. Does this sound like you? Let’s compare hire purchase car finance vs car leasing.
Types of Car Finance Products
With car finance, you’re going to encounter terms like hire purchase, personal contract purchase, and personal contract hire, among others. These three are types of car finance products, and depending on your needs and preferences, you can choose one that best fits your situation. Each different type of car finance is slightly different, but the choice will enable you to access the most suitable arrangement for you so that you can have the car you want.
You may wish to select a car finance deal like a hire purchase where you’ll own the car at the end of your contract. There’s also a type of car finance agreement, called personal contract purchase, that is more flexible and where you have the option to own the car, return it, or use its equity for another contract. You may also choose to just rent a vehicle long-term with a personal contract hire (PCH) or better known as a car lease. You can find out how HP and PCP compare in this pcp vs hp car finance article. At Carmoola, we don't provide PCP car finance at this time.
So, what is the difference between a hire purchase and a lease? The main difference between hire purchase and leasing is the former is used for actually buying or purchasing a car, but the lease is like a long-term rental of the vehicle. Let's look at each option in more depth below.
What is a hire purchase?
So what is Hire Purchase, and is HP better than getting a lease? Hire purchase is a type of car finance where you can actually buy a car without paying the full price in cash upfront. How does this work exactly?
The first step is to apply for financing from a lender. Once you’ve been approved and given credit, you can buy the car you want. Typically, though, you have to pay a deposit, which is at least 10% of the car’s price. However, you can also get zero deposit HP, too, although this would mean higher repayments and interest rates. After that, you will pay a monthly instalment throughout your car finance agreement, which typically can be one to five years.
When will I own the car in hire purchase?
When you’ve reached the end of your contract, and you’ve made all the payments, the lender will transfer the ownership of the car to you. Until that time, the car finance company is the legal owner of the vehicle. Unlike personal contract purchase (PCP) agreements, you don’t have to think about a final balloon payment that you need to settle. As long as you’ve been paying the monthly instalments on time, the ownership of the car will be transferred to you automatically when your contract is finished.
There might be a small fee for processing the paperwork, but it’s very minimal. You can check your contract for the details because this fee might differ from one car finance company to the next. Here at Carmoola, we charge just a nominal £1 fee.
What is car leasing?
Car leasing is also called Personal Contract Hire. With this type of arrangement, you’ll also pay a deposit followed by monthly payments for the duration of your contract. The usual contract term for car leasing is two to four years. The payments you make do not go toward the full price of the car. Instead, you’re paying for the value that the car will lose while you’re using it.
Will I own the car in a car leasing deal?
Since leasing a car means you’re only renting it for a long period, you will never own it outright. After your contract, you must usually return the car to the car finance company. It’s important to note that the car should still be in good condition.
Fair wear and tear are expected, but if there is any damage beyond that, then expect additional charges for the repairs. Also, remember that there’s an annual mileage limit you need to abide by. If you go beyond the agreed limit, the car finance company will also charge extra.
While you may not have the option to buy the car with a car lease contract, you may sign a new agreement after you’re done with the previous one. You can have a brand-new car to drive every couple of years without worrying about the car’s depreciation.
Hire Purchase vs Lease: Which is Better?
As you can see from the definitions above, hire purchase car finance and car leasing are starkly different. They do have some similarities, like paying a deposit followed by monthly payments but altogether, they are not the same. Hire purchase is a great choice if you want to own the car without spending a big chunk of your savings to buy it outright. Car lease agreements do not usually give you the option to buy a car. You have to return it to the car finance company.
Owning the Car
The first question you’d want to ask yourself is if you want to own the car at the end of the contract. If you’re sure about this, then a hire purchase car finance deal is the best way to go. What if you only need to have your own car to drive for a couple of years? In this case, car leasing makes more sense. Also, leasing a car is more affordable than financing a car with a hire purchase.
How much can I afford to pay for a car every month? This is another important question to ask yourself. Hire purchase monthly payments are typically higher than other types of car finance agreements. This is because your payments go towards the total price of the car. Car lease payments are more affordable because you’re only paying for the depreciation of the vehicle. You can see how fast new cars depreciate in our informative blog.
If you want to get a hire purchase deal but you also want a lower monthly payment amount, you may choose a longer repayment term. While this decreases the amount you have to pay every month, remember that you’ll be paying for the loan for a longer time. Overall, you’ll pay more interest than if you choose a shorter term.
Your Needs and Preferences
How will you be using the car? If you need to make modifications to the car, you may do so with a hire purchase, but only once the ownership has been transferred to you. While you’re still paying for the vehicle, you cannot modify the car. Be sure to check your contract and the specific details on what you can and cannot do with the vehicle. With car leasing, you’re not allowed to make changes to the car because it is not yours. The car finance company expects the car to be returned in much the same condition.
Another thing to consider is the mileage. Will you be using the car for frequent long drives? Hire purchase might be a more practical choice because you won’t be restricted by a mileage limit. When you lease a car, you have to be mindful of your mileage because you’ll be charged extra for every mile exceeded.
Here’s an Easy Way to Calculate Your Budget
Should I get a hire purchase or a car lease deal? The answer to this question depends on your budget, needs, preferences, and whether you want to own the car or not. Take time to assess these factors so you’ll be able to arrive at a sound decision. Hire purchase and car lease are good options when it comes to getting your own car to drive. You only have to choose the best one that can address your own personal needs and situation👍.
If you want to know how much car finance will cost you, use our handy car finance calculator. You can also get your budget in just 60 seconds, with no impact on your credit score.