You want a new car, and you aren’t sure whether you are going to lease or buy.
How do you choose?
There are pros and cons to both leasing and buying. And they are suited to different people.
Getting a car is a big decision and is not one you make on a whim. The most important thing is that you are fully educated on each of these options so you know you are making the right decision.
We talk people through this decision-making process every day. So we thought we would make a comprehensive guide comparing leasing and buying.
What is the difference between leasing and buying a car?
First thing’s first; what is the difference between leasing and buying?
The answer is pretty straightforward. When you lease a car, you hand it back. When you buy a car, you…well, own it.
Car leasing has been popular in the USA for quite a while now, and it’s becoming increasingly popular over here. You essentially rent a car for a length of time (usually between one and five years) while paying a monthly fee. Once that time is up, you hand the car back.
When you buy a car, on the other hand, it’s yours to keep. You can either buy it outright, in which you own it straight away, or you go through a finance scheme. A finance scheme is similar to a lease agreement; you pay monthly for a certain period of time. But, when that time is up you own the car or have the option to own.
Who is leasing for?
It’s about now that you’re wondering whether leasing is right for you.
Leasing is ideal for those who do not want to own their car. Those of us that like the thought of getting a new car every few years would be much better suited to leasing than they would to buying.
Leasing is also great for businesses, but we’ll get onto that in a little bit.
Who is buying for?
This is pretty self-explanatory. If you like the idea of owning your car, being able to do whatever you want with it, then you should buy.
Of course, it’s not as simple as just deciding right now. There are advantages and disadvantages to each that you should take into consideration.
How does car leasing work?
To some, or many, car leasing is still quite unknown. Even though it’s becoming increasingly popular, there are people who don’t know how it works. Which is completely understandable; unless you are looking for it, you probably won’t know anything about it.
So, how exactly does car leasing work?
There are different types of lease agreements. And those are;
What is Personal Contract Hire?
70% of our lease agreements are personal contract hire. Personal contract hire is designed for private individuals.
You rent a car for up to 5 years paying monthly payments as you go. Once that time is up, you hand the car back with nothing more to pay.
The monthly payments on a personal contract hire car are calculated by the cost price and the residual value of the car. This is essentially how much the finance house will be able to sell it on for once you hand it back.
Which is why prestige cars, such as Mercedes and BMW can cost the same amount on a lease as a Ford Focus, for example. It’s all down to depreciation.
What is business contract hire?
Business contract hire is essentially the same as personal contract hire, but for businesses. Otherwise known as contract hire, it works the same way as personal contract hire.
The monthly payments are also calculated in the same way. The only way business contract hire differs is that if you go through a business, you benefit from various different VAT exemptions. But, you will have to pay company car tax. For more information on company car tax you can read our guide here.
What is a finance lease?
A finance lease is perfect for businesses whose cars are doing more mileage, and more than fair wear and tear. It is also perfect for those with conversion units, such as refrigerators.
Considered the ‘traditional’ lease option for businesses, finance lease allows a company to pay a fixed monthly payment for a set period of time. Similar to the contracts I’ve just mentioned above.
But, at the end of the contract, you have three options;
- Return the vehicle
- Continue to use the car (for a one off nominal fee)
- You sell it to a third party to pay off the balloon payment at the end.
The cost of the finance lease is calculated by the overall cost of the car, the length of the contract, and the chosen end payment. This is known as the balloon payment.
The balloon can be set by you, and will depend on how much you put down initially. It also depends on how much you are willing to pay monthly, so it’s pretty difficult to give you an exact figure of how much it will cost. Within reason, of course.
However, at the end of your contract you can do something which is called a peppercorn rental. This is when you make a payment, normally your month’s payment, and you can keep the car for as long as you want. But, you do have to pay off that balloon at some point. You can either do this by buying the vehicle yourself, or by selling it to a third party.
What are the advantages of leasing a car?
I mentioned earlier that leasing has been popular in the States for some time now, and it’s becoming popular over here in the UK as well. But, why?
There are a lot of reasons why car leasing is a popular option. For example;
- You can drive a nicer car for less money
- When you lease, you only pay for the depreciation. Therefore, the monthly payments will be less than if you were going to buy the car. Also, prestige cars depreciate slower than others. So, an Audi might cost the same monthly as a Ford Focus.
- The upfront cost tends to be lower
- Deposits for lease cars tend to be between £1000-£2000. When you buy, however, deposits tend to be around the £3000 mark.
- You don’t have to worry about the disposal
- When your contract is up, you hand the car back. You don’t have to worry about re-selling the vehicle.
- You get a new car every few years
- Getting a brand new car every few years is appealing to many
- You tend to get larger discounts on a lease car, therefore bringing the price down.
What are the disadvantages of leasing a car?
We’ve listed some of the advantages to leasing a car, but what are the downsides?
- You don’t own the car
- This is pretty subjective. Some people like the thought of owning their own car. Some people, on the other hand, don’t.
- There are extra costs
- There are some extra costs when it comes to leasing including;
- Potential excess mileage charges
- Potential condition charges
- You can read more about the hidden costs when leasing a car here.
- There are some extra costs when it comes to leasing including;
- There are mileage and condition limitations
- When you lease a car you agree to do a set amount of miles each year. If you go over this, you will incur excess mileage charges. You can read about excess mileage charges here.
- You also have to keep the car in good condition. We are sure this will happen, but you will be fined if you don’t. When you lease a car, you should receive the BVRLA Fair Wear and Tear guide from your broker. This is the industry standard for fair wear and tear of your lease vehicle.
As you can see, there are pros and cons to car leasing. Hopefully this last section has given you a better idea of what car leasing is. Now, that’s enough of that. What about buying a car?
How does a finance agreement work?
What are the different finance agreements?
What is a hire purchase?
But, what’s a hire purchase?
A hire purchase is perfect for someone who definitely wants to own their car at the end of their agreement. You pay monthly payments for a set period of time. And, once you make that final payment, you own the car.
What is a cash purchase?
A cash purchase is pretty straightforward. As long as you have cash in the bank, or you have a pre-agreed credit line with your bank, you can buy the car outright. No monthly payments, no nothing.
What is personal contract purchase?
This is because you have a choice as to what happens at the end of your contract.
With a personal contract purchase, you make fixed monthly payments for a set period of time. Once that time is up, you have three options;
- Hand the car back with nothing more to pay (subject to mileage and condition restrictions)
- You purchase the car for a pre-agreed value
- This is called the MGFV, or minimum guaranteed future value. This is set at the start of the contract.
- You can part exchange the car
The cost of the personal contract purchase can vary. If you want to buy the car then you will have to pay the MGFV. This is determined by how much the finance house thinks the car will be worth at the end. That payment is deducted from the overall cost of the car. The deposit will also be deducted. After all those deductions, the final amount is split into however many months you take the contract out for. Ta-da.
Personal contract purchase is perfect for those who want more flexibility with their contract. You do not have to decide what you want to do until around a month before the contract ends.
What is business contract purchase?
Business contract purchase works in the same way except it is for business. You can also offset all the interest against company car tax.
So, there are the different types of finance agreement and how they all work.
What are the advantages of buying a car?
Buying a car is still the most popular way to get a car. Of course, it comes with its advantages. For example;
- You actually own the car
- This is the most obvious advantage to buying a car. People like the idea of actually owning their car rather than renting it, which is sort of what leasing is.
- You aren’t subject to mileage and condition restrictions
- There is much more freedom when you buy a car than with leasing
- If you buy it outright, it doesn’t have an impact on your credit rating
- It’s perfect for those who aren’t fussed about owning a brand new car
- Leasing isn’t very economical when it comes to used cars. Therefore, if you aren’t so bothered about getting a brand new car, buying is probably the best option for you.
What are the disadvantages of buying a car?
Although buying a car is a popular option, it does have its disadvantages. For example;
- You have to dispose of the vehicle
- When you buy your car, you are responsible for the disposal. This means you are the one who has to resell it. This brings me onto my next disadvantage…
- You have to think about depreciation
- Cars depreciate the minute you drive them off the forecourt. When you lease, you don’t have to worry about this because you’ll be handing it back. When you buy, however, you do have to take it into consideration when it comes to reselling.
- If you do have it on finance, you will have some extra costs
- If you have it on finance, then you are also paying interest on the money you are borrowing.
Leasing vs. Buying: Which will give me the best deal?
We’ve gone through the pros and cons of each, now let’s look at what will give you the best deal.
Unfortunately, there isn’t a way of saying which one will get you a better deal. While leasing may allow you to drive a better car for less money, it also comes with extra costs that you have to consider. You can read our article about hidden costs when leasing a car here.
The cost of buying a car may be more upfront. But, you won’t have to worry about mileage restrictions or keeping the condition within the fair wear and tear standards.
Brokers and dealerships can give you a great deal regardless of whether you lease or buy. So, there’s actually nothing to say which will get you a better deal. However, for more tips on how to get the best deal on a new car, you can read our article here.
So, as you can see; there are pros and cons to leasing, and pros and cons to buying. Hopefully this has helped you become more educated on both buying and leasing.
Ultimately, it’s your decision as to whether you buy or lease. You are the only one that knows what is best for your situation. But, hopefully this has helped you on your way to making that decision.