Leasing a car vs buying a car
Leasing vs buying
When looking at options for a new car, the question of whether to lease or buy is often the first thing that comes to mind for many drivers.
There is a lot to think about and hopefully, our guide will shine a light on some of the most important aspects to consider.
We will show you how car leasing works, the difference between leasing and buying, the pros and cons of each, and what the alternatives are.
How does car leasing work?
Car leasing or personal contract hire (PCH), as it is commonly known, is a method of financing a new car. It is just one of several options available. Leasing is an umbrella term that PCP comes under.
Leasing a car through a personal contract hire agreement is effectively a long-term rental. An upfront payment is put down and monthly repayments are calculated over a fixed period of time. This is often anywhere between two and five years as a general rule. At the end of the agreement, the car goes back to the supplier as you never take ownership of the vehicle.
With this type of contract, annual mileage is set in place. If customers go over this limit, then a hefty excess will be due. Maintenance is not really an issue as car leasing is principally offered on new cars that are covered under their own manufacturer warranties. And at the point of returning the vehicle, it must be in a decent state to avoid any further costs.
Other types of purchase agreement
There are of course a plethora of options open to people looking to lease or own a car, as well as PCH agreements. The following options are also alternatives to buying a car outright:
Personal contract purchase (PCP)
A personal contract purchase is calculated by splitting a percentage of the vehicle's value into a deposit and further monthly payments. These repayments are made over a number of years and ensure that the customer is paying off part of the capital cost of the vehicle over time. However, this will not cover the entire cost of the car. To keep the vehicle at the end of the agreement, a balloon payment will need to be made. It is optional, so handing the car back and walking away is also a possibility. Alternatively, the cycle can begin over again with a new car agreement.
Hire purchase (HP)
A hire purchase agreement takes the value of a new car and splits it over monthly repayments and an initial deposit. These payments are larger as the cost of the vehicle is covered throughout the HP contract. As a result, the customer owns the vehicle by the end of the repayment period and it is up to them if they wish to keep the car or sell it and make another arrangement.
Key differences between car leasing and buying a car
Whether buying a car or leasing a car, each has pros and cons. It all comes down to personal choice, and the following aspects need to be considered according to your own circumstances.
Deposits and up front payments
New cars cost a lot of money and there's no getting around that. Unless we are lucky enough to have a vehicle bought for us, then the various purchasing options must be explored. Buying a new car outright will usually require the entire value to be paid in full at the time of sale. Depending on the cost of the car, this can be a huge initial expense. Car leasing makes this more affordable by giving customers a chance to pay a comparatively smaller upfront payment followed by monthly instalments instead. Paying a higher deposit will lower the monthly repayments.
Some people choose to take out a bank loan, for example, to purchase a car outright. The APR on such a loan may be as attractive as that offered by a car financing company, if not more attractive. You’ll need to consider whether the monthly repayments on the loan are better suited to your financial needs versus the fixed monthly payments of a lease agreement.
Another key consideration in the argument of car leasing vs buying is the mileage. Naturally, customers purchasing a vehicle outright have no restrictions on the number of miles they do each year. The only impact it will have is on the value of the car once you decide to sell it. But, this is not the case when it comes to leasing. Repayments are often based on a small number of miles per year, although this can be adjusted if you are willing to pay more per month for the extra mileage. Going over the agreed mileage will bring large excess fees.
One of the main advantages for a customer owning a car outright is that there is potential equity building over time, depending on the type of car. Leasing a vehicle means that this will not be possible.
The flip side to possibly building equity is that many cars will depreciate in value as soon as they are driven out of the showroom. This isn’t something that needs to be considered when you are leasing a vehicle.
Customers don't tend to change new cars frequently when they are purchased as it takes time to save up for a new one. Car lease clients are able to get a new car every few years depending on when the contract ends and they have access to some of the latest models too.
Maintenance and warranties
Buying a new car and leasing a new vehicle will offer warranty benefits for the first three to five years. However, an outright purchase of second-hand vehicles may incur ongoing servicing and maintenance costs.
If you want to customise your new car, then you will need to buy it outright rather than lease it. There are strict rules for making any changes to a leased vehicle and oftentimes, no customisation is allowed at all.
There is absolutely no smoking in a leased vehicle and if you choose to do so anyway, then costs will be incurred once you hand the car back. Obviously, there’s no need to worry about this if you are purchasing.
Pros and cons of buying a car
There are several pros and cons to bear in mind when considering an outright car purchase and the following points are certainly worth thinking about.
Significant financial commitment
Taking out a large loan will require credit checking and adding further financial commitments to your budget. Make sure you know how much you can afford before buying a new car.
Anyone who has purchased a new car in the past will know the pain of reselling a vehicle that has lost thousands of pounds worth of value in a short space of time. This needs to be accounted for when it comes to swapping in an old car to buy something newer.
The latest tech
If it's in your budget, buying a new car provides an option to stay up to date with the latest technology. Fuel saving and state-of-the-art additions are definitely a reason to consider purchasing brand-new vehicles.
Shiny new cars look great and feel great, but because of their high value, it often means insurance premiums can be significantly higher. If you are buying second-hand, this is likely less of an issue.
Maintaining a new car isn't usually an issue as the manufacturer will offer a warranty. However, second-hand cars can run into mechanical problems over the years. They could end up costing more to maintain and may not be worth the hassle. Did you know that 19% of car users have taken out debt to pay for servicing costs?
Buying a brand new car means that a customer is likely to have it in their possession for many years. People who enjoy regularly changing vehicles may want to avoid this restriction.
Pros and cons of leasing a car
In the battle of car leasing vs buying a car, there are also pros and cons associated with leasing as well. To find the perfect solution for what you need, the following points need to be considered.
Leased vehicles will always offer an option to drive one of the latest models. Due to the higher residual value and lower maintenance costs, lease hire companies only work with new cars. It's possible to swap these vehicles every few years and constantly have an attractive vehicle sitting on your driveway.
Of course, nobody intends to damage their vehicle, but when we put a dent in our own cars, it doesn't have lasting consequences. This isn't the case with the lease hire and it can incur additional costs as a result.
Lower finance costs
It could well make more financial sense to lease a vehicle rather than take out a loan. Loan repayments can amount to a sizable chunk of our salaries whereas financing can be a more prudent option.
Leasing a car for a few years means that the contract and responsibility of that vehicle ends a lot quicker. This is a complete contrast to those purchasing new vehicles that will probably be stuck with them for many years to come.
Mileage costs can be high
Anyone that plans to do a lot of miles in their new car should consider the fact that lease hire agreements may be restrictive in this respect. Additional packages to increase the mileage can also incur heavy fees.
No changes to the vehicle
Forget about adding your own set of wheels, spoiler or new sound system to a lease-hire vehicle. Everything must be exactly the same when the car is handed back. In an uncertain world, do you want to have to keep hold of a car for such a long time too?
When is it best to buy a car?
There are a few instances when purchasing a car makes more sense. If you have the money for it and you know you can afford all the extra costs that come with owning a vehicle, then it makes sense to buy outright. That way you can change the car to suit your needs as you like and don’t have to worry about handing it back to anyone. This is also the best option if you plan on keeping your car for many years and aren’t looking to swap it out for something newer later down the line.
When is it best to lease a car?
Leasing a car makes far more sense for anyone that wants to avoid high initial costs. There are also the added benefits of driving the latest models, and the thought of depreciation isn't even an issue. But there are mileage constraints to consider and you should take this into account if you plan on taking long journeys on a regular basis.
Have you considered a car subscription?
Whether to buy a car or lease a car shouldn’t be the only conundrum. There are alternative options available to you that may provide more benefits than either of the above.
Like a Drive Fuze car subscription, for example.
With a car subscription you have the freedom to choose how long you have the car. You are in control - there are no hidden fees or penalties when you return a car, and car subscriptions work on a rolling monthly basis, with no long term contracts.
The best thing about a car subscription is it is all-inclusive. Unlike leasing or buying a car, this option includes everything from your maintenance, servicing, tax and fully-comprehensive insurance in one monthly payment. This gives you the freedom to focus on the important things in life, not budgets.
Try before you buy
Another great benefit of a car subscription is the option to try before you buy - if you are not sure whether to buy an electric car, you have the freedom of choosing an electric car on a subscription for a few months to see how you find using them.
So, why not take a look at our range of cars and sign up for your car subscription today?