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Leasing a car vs financing a car

March 27, 2023

Leasing vs financing a car

They say that buying a car is the second biggest financial commitment that many of us will ever have to make. So it makes sense that leasing vs financing a car is up for debate as the former can reduce the financial burden and offer other benefits too. But it’s a personal decision and customers want the facts to help them decide.

That’s where our comparison of the two could help make life easier. We’ll outline the full details involved with leasing a car, how financing the outright purchase could be a winner - as well as introducing a viable alternative in car subscriptions.

What is car leasing?

Car leasing is commonly known as personal contract hire (PCH). The first thing to note with this form of financing is that the customer never owns the vehicle. The financing consists of two parts, which are an upfront payment and monthly repayments. It is an attractive option as the overall cost is less than financing a car purchase outright. The leasing company takes into consideration the fact that they will still hold some residual value in the vehicle when it is handed back and this gives them further options to appreciate more profit from their investment.

Personal contract hire usually lasts for a period of two to three years. This is predetermined at the start of the contract and the monthly repayments are worked out accordingly. It is possible to lease a car for other lengths of time, but this needs to be discussed with a service provider.

Taking hold of a car through a lease hire agreement means that the lessee assumes responsibility for fuelling and maintaining the vehicle at all times. But a major hindrance that this method brings is that there are mileage restrictions. Standard mileage packages are in place and if the customer goes over this, then additional fees are incurred.

What is car financing?

Car financing comes in various shapes and forms and ultimately involves borrowing money to purchase a vehicle. There are several ways to achieve the same result and each comes with its own pros and cons. One of the main things to consider when buying a car outright using most forms of financing is that there will be interest charged on the loan amount. This can drastically increase the amount of money that needs to be paid back over the term of the loan.

Personal loans

A personal loan is probably the most popular way to finance a new car purchase. It is possible to obtain these through various financial institutions such as banks and building societies. Personal loans can be repaid between one and five years, in general, and the amount available to borrow will depend on the customer's personal circumstances. A car loan will be secured on the value of the vehicle so that the lender will be able to recoup the finance in the event of missed payments. It may be possible to borrow more than the value of the car in certain circumstances if modifications to a vehicle are required.

Personal Contract Purchase (PCP)

With a personal contract purchase, the value of the vehicle is split between an initial deposit and a series of monthly repayments. Customers pay off some value of the car during the contract - plus interest in some cases. At the end of the agreement, there is an option to take ownership of the vehicle by making a balloon payment. However, this is not obligatory and it is possible to hand back the keys and walk away or take up another arrangement. Further deals can often be quite attractive when part exchanging the vehicle and continuing with the same financing company.

Hire Purchase (HP)

A hire purchase agreement has some similarities with a personal contract purchase but it is a distinct product. The value of the car is divided over an initial upfront payment and monthly instalments which continue for a number of years until the value is paid off in full. At the end of the process, the customer takes ownership of the car and has further options at this point. Firstly, they can keep the car and continue to use it as they wish, or they can sell the car and walk away with the cash in a traditional second-hand sale. Finally, the HP provider may offer to buy the car back from them or allow them to use it as a part exchange for a new deal.

Pros and cons of car financing

There are several pros and cons that arise when considering car leasing vs financing a car. Let's take a look at some of the main benefits and drawbacks of the financing method to help make the decision process a little easier.

Endless choice of cars

Car financing to purchase a car outright allows a customer to choose pretty much any car that they can afford. If the manufacturer has it available, then the options are endless. Naturally, it all depends on the customer's personal budget.

Lower initial investment

Making a one-off payment for a vehicle means that a customer's bank account will take a large hit in one go. Using financing, it's possible to spread the cost of the car over a number of years, thus reducing the financial burden.

Change vehicles reasonably frequently

Taking out a car financing agreement presents the customer with several attractive options during the course of the repayment. It's possible to go back to the service provider and request a new car at any point and refinance the deal. Financing enables the acquisition of newer cars and by doing so, car owners can take advantage of better technology that can help with fuel efficiency and other cost-saving areas.

Depreciation issues

One major downside of financing the outright purchase of a vehicle is that it will depreciate fairly rapidly at the beginning. As soon as a car is driven off the shop floor, it loses a chunk of its value, which cannot be over-emphasized. For that reason, some clients prefer to purchase nearly new vehicles that don't suffer from this initial loss.

Potentially high insurance

Purchasing a new car means taking out an insurance policy to cover the cost of the vehicle in the event of loss, fire, theft and damage to other cars. These premiums may be a lot higher for a new vehicle depending on the make and model.

Maintenance costs

Financing the purchase of a second-hand vehicle may come with extra maintenance costs. If a maintenance package isn't available, then it is down to the customer to cover any repairs throughout the lifetime of the car. Some people choose to save a small amount of money each month to contribute towards any potential repair costs that may occur.

Long-term commitment

When buying a car and taking full ownership, there is a long-term commitment to consider. Loans will need to be repaid regardless of what happens to a customer's personal situation or the car. In hard times, the bank will still want their repayments.

No mileage limits

Buying a car rather than leasing it does eliminate any mileage limit issues. Owners can rack up as many miles as they like throughout the car’s lifetime without worrying about excess mileage charges.

Interest added to the load amount

Choosing to purchase a vehicle using a loan will leave the customer at the mercy of interest rates. These are set by the financing company and they may not always be the best deals available. It always pays to shop around to see what's out there.

Pros and cons of leasing a car?

It’s only proper when looking at leasing vs financing a car to check out the advantages and disadvantages of leasing a car as well. So here are the main elements to bear in mind.

Car swap every couple of years

Car leases are usually taken out over a period of two to three years. This way, it's possible to get hold of a new vehicle fairly frequently and enjoy all of the obvious benefits such as enhanced tech, better fuel efficiency and just plain and simple enjoyment of owning a brand new vehicle.

Damage costs

When leasing a vehicle, there are damage costs to take into account, and anyone thinking of parking on busy roads should take notice of this caveat. Owning a vehicle outright removes any worries about handing a car back with dents and scrapes. However, this is not the case with a lease agreement.

Lower monthly repayments

As leasing a car means that the customer doesn't actually own the vehicle, they won't be paying off the full cost of the car. This ensures lower monthly repayments in general and frees up cash that could be spent on other things.

No long-term commitment

Taking ownership of a car for a couple of years isn't the longest commitment that we will ever have to make, usually between 2-4 years. As personal circumstances change, customers can decide to give up their vehicle at the end of the lease contract. It’s always possible to take out another lease when there is more spare cash available.

Troublesome mileage constraints 

It's worth saying again, always consider the mileage constraints when taking out a vehicle lease. Going over this fixed amount can incur large fees as it reduces the value of the vehicle for the lease provider. However, it is possible to arrange a special agreement to lift the limit at the cost of higher monthly repayments.

When is it best to finance a car purchase?

Looking at all of the pros and cons above, it's easy to see that there are certain circumstances when it is best to finance a car purchase vs leasing. Customers that prefer to keep a vehicle for many years until it is effectively run into the ground may want to consider ownership as it will potentially save money in the long run. 

Customisations are also possible if the car is owned and there's no worry about any added fees for handing a car back that is damaged. Buying a car from a private seller is only really an option when taking complete ownership of the car rather than leasing it. And anyone contemplating extremely high mileage would do well to consider the purchase option.

When is it best to lease a car?

Call leasing is the perfect choice for those wanting to change vehicles every 2 or 3 years. This means newer models are always at their disposal and the benefits of advanced technology can continuously be enjoyed. If the thought of a vehicle depreciating in value over time is a worry, then this is another reason to opt for leasing. Monthly repayments are fixed with a lease agreement so customers know where they stand at all times. And if excess mileage is never an issue, then a car lease won't feel restrictive.

Have you considered a car subscription?

Car subscriptions are becoming the go-to alternative to traditional car leasing and financing - and it's not hard to see why.

A car subscription with Drive Fuze gives you access to the latest vehicles, delivered to your door within 7 days, with no lengthy contracts which you would otherwise get with traditional leasing and financing. 

What's more, At Drive Fuze, our monthly car subscriptions are all-inclusive. This means your monthly payments cover both your use of the vehicle and associated costs such as fully-comprehensive insurance, tax, servicing, maintenance, and even breakdown cover. All of this is factored into just one easy monthly payment with no long-term commitment - giving you the ease, value, and flexibility a traditional lease can’t offer.  

Take a look at our range of cars and sign up for your car subscription today and experience the freedom of a Drive Fuze car subscription.