Whichever method you use for getting your next car, what matters is you get the best deal for a model which suits your lifestyle.
Two popular options of vehicle finance are leasing (also known as Personal Contract Hire or PCH) and Personal Contract Purchase (PCP). Both involve long-term rental of a new vehicle, with the latter also offering deals on used cars too. Leasing doesn’t give you the option of owning the car at the end, whereas PCP does, albeit for a lump fee at the end of your deal.
Want to find out whether leasing or PCP fits your motoring needs better? Read our guide for everything you need to know before deciding.
What is leasing?
Leasing lets you pay a set monthly fee for a brand-new car every 2-4 years. At the end of your contract, you simply hand the lease car back to the leasing company and either take out another deal on a new model, or you can walk away.
When handing the car back, you’ll have to make sure that you’ve stuck to your agreed annual mileage and that it’s in a condition that reflects fair use.
Unlike PCP agreements, you don’t have the option to own the car at the end. However, if you have a set budget you can afford each month for a car, leasing is an affordable way to drive a new vehicle.
What is PCP?
PCP finance differs to leasing in that you have more flexibility at the end of your agreement. You can either hand your car back to the provider, swap it for a new one (and use any equity towards the deposit on another car), or buy it by paying a lump sum known as the balloon payment.
There are also other factors to consider on a PCP deal that you wouldn’t need to on a lease, such as APR (Annual Percentage Rate) interest rates. This is the amount you pay each year to borrow money from the finance provider to finance your car.
Leasing companies don’t show this in the contract and essentially it’s covered in the monthly payments. PCP contracts work like a loan so you can see the rate of interest you pay, which is usually between 4-8%. However, on used cars this can be as high as 20%. So you’ll want to look for low interest rates when deciding on a PCP deal, as well as the total cost of finance once admin fees, monthly payments and deposit are factored in.
Balloon payment
With PCP, not only is there a deposit at the start of the agreement, but also a balloon payment at the end. This only applies if you choose to purchase the car at the end of the contract.
Even if you don’t have any interest in owning the car at the end, you’ll still agree this final settlement fee at the start.
The lump sum is determined by the finance house at the start of a deal, who will calculate the GMFV (Guaranteed Minimum Future Value) of your car at the end of the deal. The monthly payments for your deal is the difference between the car’s retail price from when you first receive it and its end-of-contract value.
Is leasing or PCP for me?
There are several factors you should consider which will help you decide which option is right for you.
How you plan to use the vehicle, whether you want to own it and your monthly budget will all give you an indication of which type of deal you should go with.
Ownership
If you’re set on owning your car, a PCP agreement will be a more suitable option for you than leasing because you have this option at the end.
However, the majority of people that finance a car using PCP don’t go on to pay the balloon payment to own the car. In a lot of cases, it can be cheaper to lease a brand-new vehicle because the monthly payments tend to be more affordable than if you were to choose an equivalent new model.
All lease cars belong to the finance provider that supplies them, so you’ll need to hand these vehicles back to them at the end. You may be allowed to extend your agreement for a few months if you’re waiting on delivery of a car that’s a factory order. This will be at the discretion of the provider, however, and the likelihood is that you’ll be charged a fee for extending your lease.
Budget
Generally speaking, PCP costs more over the course of a contract when compared with leasing. This is because there’s extra flexibility involved with the former, such as no-deposit deals, new and used cars available and, of course, the ability to own the vehicle for a one-off balloon payment.
Many people take out PCP deals and treat them like a PCH, opting not to exercise the final payment to own the car. While having an additional option there can be an attractive offer, it’s worth thinking about whether you want to own the car before signing any contract – this way you can avoid overspending.
Depreciation is factored into the cost of your lease deal. So, if you drive fewer miles and specify this in your agreement, it’ll wind up being cheaper.
PCP involves borrowing a car’s total amount, with interest being paid throughout for people who intend to own the car at the end.
Flexibility
There’s no doubt that PCP offers the most flexibility out of the two, which can be a dealbreaker for certain drivers.
For example, you have three options at the end of a PCP deal, compared to leasing’s one.
At the end of a PCH deal, the car goes back to the finance company, without anything more to pay (provided you’ve kept the car in good condition and stuck to the agreed mileage cap).
It’s not as straightforward if your car is on the alternative method of finance. You have the following options:
- Return the car to the dealership or provider with nothing more to pay (provided there’s no damage in excess of fair wear and tear and you’ve stuck to the agreed mileage cap).
- Pay the optional final fee and own the car.
- Trade in the car with a retailer in order if the price is more than the GMFV – the difference can then be used as a deposit for your next car.
It may be that you’re dead certain that you don’t want to carry on using your new car. The idea of ‘usership’ for consumables has increased in popularity in the past two decades, with phone contracts and finance options for electricals a sure way of getting the latest product for a monthly fee which fits your budget.
Cars are no exception, either. Simply put, owning a car comes with responsibilities which most people don’t want to spend their time or money on.
Repair and maintenance costs are the biggest part of this, which can become frequent and more expensive the older your car gets. As such, what happens at the end of the deal to the car becomes less of a concern to you when you’re leasing.
Early termination
PCP and lease agreements differ when it comes to early termination.
For PCP deals, as long as you’ve paid 50% of the total finance on a deal back to the finance company, you have the option to walk away.
Early termination of a lease deal comes with charges – usually this is 50% of any remaining finance, plus an early termination.
Some providers may be able to extend your deal in order to reduce the monthly payments if you want to avoid hefty charges.
Another way they could make the cost manageable is by letting you ‘trade down’. This is when you trade your current car for a cheaper model in order to bring down the cost. The outstanding finance for the older car will still need settling, however this will be carried over to your new vehicle’s deal.