If you are looking at getting a new car, you might be wondering which is better; leasing or financing.
Financing your car is a more traditional way of getting a new car, but leasing has become increasingly more popular and is a very viable option for many.
So in this article, we are going to look at both leasing and financing for new cars, weigh up the pros and cons and try to decide which one is better.
What is leasing?
As we said, leasing has become extremely popular as of late for both business and personal customers.
Leasing is essentially where you have a car for a period of time, usually between 1 and 5 years, while paying a monthly fee. Once that period of time is up then you hand the car back with nothing more to pay (subject to mileage and condition restrictions but we will talk about them in a little bit).
The main type of lease agreement that we will be looking at is Contract Hire, or Personal Contract Hire if you are a private individual.
What is Contract Hire?
Contract Hire is what many people are talking about when they refer to leasing, and is a scheme that is growing in popularity as we speak.
A Contract Hire agreement is where you have a car for a set period of time while paying a monthly fee. Once this time is up then you have nothing more to pay. With a Contract Hire, you have a pre-agreed mileage limit. If you go over this limit, then you will be subject to a fee, called the excess mileage charge. You can read more about excess mileage here. You also have to keep the vehicle in a condition that is in line with the BVRLA Fair Wear and Tear Guide. If it is judged to be in a condition that is outside the BVRLA Fair Wear and Tear Guide, then you may be subject to a fee. You can read more about that via the link below.
There are plenty of pros and cons to Contract Hire, and in turn leasing itself, and we will go into more detail about that further in the article.
What is car finance?
Now we know what car leasing is, what is car finance?
Car finance is a different way of buying a car. It is similar to a lease contract in the way that you pay a monthly fee for a set period of time. However, when the contract is up, you either own the car or you have the option to own the car. There are two types of finance agreement available to you; Hire Purchase and Contract Purchase (or Personal Contract Purchase if you are a private individual).
What is a Hire Purchase?
A Hire Purchase is the most common finance scheme and one that you have most likely heard of.
A Hire Purchase is where you pay a monthly fee for a car for a set period of time, up to 5 years normally, and once that time is up you have nothing else to pay and the car is yours to keep. You do not have mileage or condition restrictions on a Hire Purchase.
Watch the video below to learn more about Hire Purchase, or you can read about it here.
What is a Contract Purchase?
A Contract Purchase works in a similar way, but there is a difference in terms of what happens at the end. At the end of a Contract Purchase, you have three options;
- Hand the car back with nothing more to pay
- Subject to mileage and condition restrictions
- Purchase the car for a pre-agreed amount
- This pre-agreed amount is set at the beginning of the contract and is called the Minimum Guaranteed Future Value
- Part exchange the car
- You will still need to clear off the Guaranteed Future Value, but any profit you make, will be yours to keep.
So a Contract Purchase gives you a few options, and you don’t have to decide in regards to what you want to do until the contract comes to an end.
The main difference between leasing and financing is that when you lease a car, you do not have the option to own the car at the end of the contract. Instead, you hand the car back and get another one. If you finance a car, then the chances are you are going to own the car at the end of the contract. Both have their advantages and disadvantages and are suited to different people. This is what we are going to talk about now.
What are the advantages and disadvantages of leasing?
There are plenty of advantages to leasing and more people are picking up on this fact, which is why it’s become so popular. Here are just some of the benefits of leasing;
- You can get a new car every few years
- Many people like leasing because they can get a new car every few years without the hassle of selling your current car
- You don’t have to worry about the disposal of the vehicle
- This is because you hand the car back at the end of the contract and therefore don’t have to go through the re-selling process
- You don’t have to worry about depreciation
- Again, because reselling the car isn’t your responsibility hence why you don’t have to worry about depreciation.
- Leasing can often be cheaper than financing a car
- This is because you only really pay for depreciation when you lease a car, rather than the whole cost of the car. Therefore, leasing a car can often be cheaper
- This also means you can often drive a nicer car for less money
- Prestige cars such as BMW and Mercedes depreciate slower than other cars, therefore lease payments can be much more affordable than people think.
- There are also often more discounts on lease deals.
However, leasing isn’t for everyone. There are some disadvantages. For example;
- You don’t own the car
- Some people are okay with this but others aren’t and it is something that you need to consider
- You are subject to mileage and condition restrictions
- This means you could be subject to extra costs further down the line.
- Lease contracts are difficult to get out of
- If your circumstances change then lease contracts can be tricky to get out of. They aren’t meant to be ended early. Therefore, if you are likely to have a change in circumstance during your lease contract, it probably isn’t the best idea for you.
So those are some of the limitations of leasing a car.
What are the advantages and disadvantages of financing a car?
We’ve established the pros and cons of leasing, now let’s look at the pros and cons of financing a car.
There are many advantages of financing a car, including;
- You own the car at the end
- If you like the idea of having a car to own at the end of the contract, then a finance agreement is the best option for you
- If you have a Contract Purchase or Personal Contract Purchase agreement, then you have a few options to choose from
- This is great if you aren’t sure whether you want to own the car or to hand it back
- It staggers the cost of the car
- A finance agreement is perfect for those who want a brand new car but don’t want to buy it outright, either using cash or via a bank loan.
- You aren’t subject to mileage and condition restrictions
- This is applicable if you have a Hire Purchase agreement
Again, there are some disadvantages. These include;
- If you have a Contract Purchase or Personal Contract Purchase agreement, then you are still subject to mileage and condition restrictions
- However, this is only if you hand the car back.
- You don’t get a new car every few years
- Unless you go through the process of selling your current car and clearing off the Guaranteed Future Value
So those are some of the pros and cons of financing a car.
Which is better; Leasing or Financing?
After all of that, which is better; leasing or financing?
It honestly depends on your situation and what you are looking for in a new car. If you like the idea of owning a new car every few years and the thought of not having to worry about depreciation, then leasing is perfect for you. There is also a chance that you could get a better deal when you lease a car, because you are only paying for the depreciation instead of the whole cost of the car.
However, if you want to own your car at the end and don’t want to be restricted by mileage or conditions but also don’t want to have to buy a new car outright, then we recommend looking for a finance option.
To recap, leasing a car is essentially like renting a car. You have it for a set period of time while making monthly payments. When that time is up, you hand the car back with nothing more to pay, subject to mileage and the condition of the car. Financing a car, however, means that you pay a monthly fee but at the end of the contract you can own the car. If you like the idea of having a new car every few years without having to worry about depreciation and disposing of the vehicle, then leasing is perfect for you. You can also often get better deals on lease contracts. However, if you want to own your car at the end or you don’t want to be bound by mileage limitations or condition restrictions but you also don’t want to have to buy a car outright, then a finance agreement is probably your best option.
There is no definitive answer when it comes to which is better; leasing or financing because they are both suited to different people and different situations. Therefore, we recommend that you do further research and talk to experts before deciding which option is best for you.