Leasing vs PCP
Leasing vs PCP
Leasing vs PCP is just one of the comparatives to be made when considering taking ownership of a new car. The distinction between the two may not seem as clear cut in the beginning so it’s important to gather as much info as possible to aid in the decision-making process.
In our guide to these two popular methods, we’ll show you exactly how each one works, the pros and cons of each and why you might consider one or the other. We’ll also cover a popular alternative to traditional leasing a PCP - car subscription.
How does car leasing work?
When looking at the differences between car leasing vs PCP, it's important to understand what the two terms mean. Starting with leasing, most people are referring to a personal contract hire, or PCH as it is commonly known. Leasing a car is effectively renting it for a long period of time and customers never take ownership of the vehicle. However, unlike regular rentals that are intended for a very short period of time, car leasing will last for a number of months or years.
With a lease, an initial deposit and various monthly repayments are calculated at the start of the contract. The lease provider then takes the car back at the end of the agreement and hopes to sell it on for the value that they initially calculated. The customer doesn't need to worry about any of this though. They simply pay a deposit and their monthly repayments and drive the car. There are various pros and cons to consider and we will take a look at these in just a moment.
What is PCP?
A personal contract purchase is a midway solution between buying a car and leasing one. Again, an initial deposit is paid and monthly repayments are calculated depending on the difference in value between the car's new purchase price and its second-hand projected value at the end of the contract. Repayments are usually made over two or three years, but it is likely that the repayments will be higher with PCP as part of the car’s value is being paid off.
However, at the end of a personal contract purchase, the customer has a few options to consider. The car can simply be returned to the contract provider at the end of the arrangement if required, or it's possible to buy the car from them for the pre-arranged second-hand price. A third, and sometimes more attractive option, exists in part exchanging the vehicle and beginning a new contract that will often result in the best deals available. It will work out more expensive to complete a personal contract purchase vs leasing as there is the option to make a final balloon payment and purchase the car.
Cost considerations for car leasing vs PCP
When considering leasing vs PCP, there will always be costs to take into account. And these costs need to be weighed up against the various pros and cons that are coming up. Using all of this information, it is possible to make an informed decision as to which method of car ownership is right for the individual.
With both methods, there will be a deposit to pay –usually around 10% of the car price. This is calculated, and for PCP customers, it goes some way towards paying off a chunk of the value of the vehicle. Whether leasing or purchasing over a number of years, the vehicle remains the property of the lease or contract provider throughout and they will need to protect their investment with this initial outlay from the customer.
Both leasing and PCP present a financial risk for the service provider. To make sure they have the best chance of receiving payment for their vehicle, a credit check needs to be performed. This will take into account any other financial outgoings that the customer has and, of course, their income as well.
Unless purchasing a car outright, there will be a limit on the number of miles that the customer can drive each year. This is because it adds to the depreciation of the vehicle over time. It is possible to adjust the mileage allowance in most cases and the monthly repayments can be changed accordingly. But if they go over the mileage limit without prior permission, then fees can be incurred.
Obvious damage and excessive wear and tear to a vehicle in the case of both leasing vs PCP will result in additional costs. It is always best to ensure that the vehicle can be kept in a safe place and always driven responsibly to avoid this occurrence.
In the case of a personal contract purchase, an optional balloon payment is included at the end. This will be the guaranteed future value of the car at that point and must be paid in order to take ownership of the vehicle.
As the customer has no option to purchase the vehicle at the end of a personal lease, the service provider will usually include non-fuel costs as part of the package. This keeps the car in the best possible condition for when they come to resell it.
Pros and cons of PCP
Now it is time to take a look at the potential advantages and disadvantages of taking out a personal contract purchase.
Fixed monthly payments
It is essential to know where we stand financially every month, and having a car purchase plan that doesn't alter throughout the life of the contract is extremely useful. Customers know their costs will remain the same each month right from the beginning.
Potentially avoid depreciation concerns
When there is no intention to pay a balloon payment and take ownership of the vehicle at the end of the contract, depreciation doesn't come into the equation for the customer. They can leave the service provider to worry about this.
Drive the latest models
PCP is a popular way for car manufacturers to get their new cars out of the showroom and onto the road. Buying a car outright isn't an option for most people and this is the next best way to achieve it. Many of the latest models with various specs are available to buy through the PCP method.
No large deposits
The monthly repayments do most of the heavy lifting with personal contract purchases. The initial deposit is quite small at around 10% of the vehicle value.
Flexibility for those with poor credit histories
Some people simply don't have a fantastic credit history and this often excludes them from taking out finance or personal loans. It is still possible to take out a PCP in this instance, but expect to see the monthly repayments reflect the added risk.
Balloon payments are high
In general, the monthly repayments will go some way towards paying off the vehicle value but they don't come close to the full amount. This is picked up by the balloon payment at the end and it can be quite substantial.
Added costs such as exceeded mileage, damage and maintenance all need to be taken into consideration. This can make the overall cost of owning a vehicle more expensive than first imagined.
Fixed contract period
A PCP contract will tie customers in for a fixed number of years. It's very difficult to get out of this arrangement before the end date if at least 50% of the car hasn’t been paid off.
Pros and cons of leasing a car?
As you might expect, leasing a car isn't without flaws and there are various pros and cons to take into account. Weigh these up carefully before entering into any agreements.
New vehicles to choose from
Leasing a vehicle gives access to some of the very latest makes and models. This is often considered a huge advantage. It allows customers to experience the very best cars on the road while paying lower monthly repayments.
Regular car swaps
Leasing doesn't last forever, and after a while, it's possible to try out something new. Simply hand the car back at the end of the lease and get a new one.
Damage is the customer’s responsibility
If anything happens to the car while in the customer's possession, then they will be responsible for fixing it. Handing back a lease-hire vehicle with dents and scrapes will prove to be quite costly.
Lower monthly repayments
When considering leasing versus PCP, the size of the repayments will often come into the equation. With the lease, these repayments will be smaller as the customer isn't paying off any of the value of the vehicle for their own benefit at the end of the contract.
No long-term commitment
A car lease can last for as long as is necessary and doesn't have to run into several years. This means that the customer can make an arrangement for a reasonably short period of time.
There is no way of getting around it, if customers aren't buying a car outright, then the mileage needs to be taken into consideration. Go over the agreed limit and there are fees to pay.
No changes available
Making any changes to the car is impossible when using a lease agreement. Modifications will invalidate the lease and the customer could be obligated to purchase the vehicle.
Car leasing or PCP - which is right for you?
After weighing up the pros and cons of leasing vs PCP, it’s time to consider which method may be best. They both offer many great advantages but they still come with a certain level of commitment for the lifetime of the contract.
With either option, customers can get behind the wheel of a new car fairly quickly—although this will depend on the lead time for the car that has been selected. New vehicles are taking longer to manufacture than in previous years so bear in mind that there could be initial delays.
Want to own the vehicle eventually?
In this case, PCP is the clear winner. Leasing a car means that customers only keep the vehicle for the length of the contract and then hand the keys back, whereas PCP gives the option of buying the car at the end.
Concerned about monthly costs?
PCH tends to offer lower monthly repayment costs as customers aren’t paying off the value of the car. At the end of the lease, the service provider retains the vehicle and can sell it or rent it to a new client.
Is flexibility important?
PCP has a selection of options available at the end of the contract. It’s possible to hand the car back, buy it or trade it in to get another deal on a new car. Lease customers will simply see the car returned to the owner.
Possibility of early termination
With a PCP agreement, it is difficult to terminate the contract prior to completion until later on in the agreement. At the very least, 50% of the contract cost will need to be covered in most cases. Before that point, customers have very little chance of walking away. PCH is a little easier to stop early but 50% or even the complete hire costs may need to be covered in full.
Have you considered a car subscription?
Of course, leasing vs PCP isn't the only decision to weigh up when thinking about getting a new car. There are further options available, such as a car subscription. Car subscriptions are fast becoming the viable alternative to standard car leasing and PCP.
One of the main benefits of car subscription over leasing and PCP agreements is the rolling monthly contract, giving you the freedom to use your new car for however long you need it.
Car subscriptions with Drive Fuze are also all-inclusive - meaning your fixed rolling monthly cost not only covers your use of the car, but also fully-comprehensive insurance, tax, maintenance, and breakdown cover - 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.