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Whether to buy a new car or lease one can often be a difficult decision. It’s difficult to know which offers the best investment, and which is best suited to your individual circumstances. We discuss the differences between them.

Should you lease or buy your next car? PCH vs PCP

Whether to buy a new car or lease one can often be a tough decision. It’s difficult to know which offers the best investment, and which is best suited to your individual circumstances. We discuss the differences between them.

Often called Personal Contract Hire (PCH), or Business Contract Hire (BCH), leasing is essentially a long term loan of a new vehicle. It can be a great way to get the keys to a brand new luxury motor, with a relatively small upfront cost. The main difference between leasing and buying new, however, is you never actually own the vehicle, and at the end of the contact, you simply hand the keys back to the leasing company.

Leasing contracts tend to come for any term between 2 and 5 years. You normally pay an initial deposit (usually 3-6 months equivalent monthly payments) then a fixed monthly payment for the remainder of the term. 

Yes. As part of the leasing agreement you will have to agree to a set maximum number of annual miles. If you go over this agreed limit then there will be a fee to pay per mile extra you have driven. As a general rule, it’s better to overestimate the number of miles at the beginning than pay penalty fees at the end. The costs for excess mileage fees can vary dramatically across lenders, and could end up being very expensive.

Warranty, Servicing, MOT and Vehicle Excise Duty

Most lease companies will offer a warranty and servicing package. As the vehicle will most likely be brand new, you will automatically get the manufacturer’s warranty included (often around 3 years). If you’re leasing for longer than this, say 4 or 5 years for example, you may be offered an extended warranted option to keep your vehicle covered for the duration of the contract.

All vehicles require regular servicing to keep them in good working order, and your lease contract will almost definitely require the vehicle to have all of these done, and on time. That said, the cost of the servicing is not always included in the contract, so it’s worth enquiring how much extra it will cost to have the service package on top of the vehicle deal as well. It’s also worth contacting the vehicle manufacturer directly separately, it is often cheaper to take out a separate service package with them as opposed to just going with the leasing company. They know people will pay for the convenience of a single monthly bill with them.

For more information on why you should keep your vehicle serviced regularly, see our article Why you should get your vehicle serviced regularly.

As standard, there are rarely any MOTs included with a lease. New vehicles are exempt from having to pass an MOT for their first 3 years, but thereafter you’ll need to have one every year. Check with your lease company whether you have any MOTs included if your contract is for longer than 3 years. (For more information on what an MOT is, and what is checked, see our article What is an MOT, what is checked and when is it due?)

One benefit of leasing is that Vehicle Excise Duty (vehicle tax) will be included in the package. Whereas if you were to buy the vehicle, whether cash or finance, it would be your responsibility as the buyer to fork out for this.

Regardless of how you obtain your next vehicle, you'll have a number of ongoing running costs that you'll need to factor into your budget. Be sure to add the cost of these onto any monthly payment you are quoted when calculating the total cost of having the vehicle.

Wear and tear items such as tyres and brakes won’t be included in any finance or leasing agreement, so factor in the cost of having to place these periodically.

You’ll  have to provide your own insurance for the vehicle (fully comprehensive, of course, if financing or leasing), to ensure you are legally allowed to drive the vehicle and are covered in the event of an accident. Make sure you get a quote online before signing any contracts. Insurance on new cars can be quite a lot more than on used cars.

For more information on whether to buy new or used, see our article Used car vs new car - Which should you buy?.

It’s the bain of all our lives, but regardless of buying or leasing, you’ll need to budget for regular trips to the petrol station. Of course, if you’re considering an electric vehicle, this could be a lot less expensive.

For more information on whether to consider buying an electric vehicle, see our article Is it time to buy an electric vehicle?, or for help choosing which fuel type to opt for, see Our guide to different types of fuel - Petrol vs Diesel.

As you do not own the vehicle when leasing, you will be responsible for any repairs that are needed before handing the vehicle back. Acceptable wear and tear is usually allowed, but attempt to hand the keys back with a huge scratch down the side of the car, or a rip in the backseats upholstery, then you’ll be charged a hefty repair cost to put things right.

Not when leasing, and if financing, not until the loan is repaid in full. As the vehicle is always owned by the lender then you will not be authorised to modify the car in any way. When leasing or taking out PCP, it must be handed back in exactly the same state as it was received. Ie, no additional spoilers or engine remaps in sight.

For more information on what a remap is, see our article What is engine remapping and is it worth it?.

What sort of vehicles are available on lease?

You can lease pretty much any type of new vehicle. However, most people tend to opt for a lease in order to obtain a higher-end model than they otherwise could afford. For this reason you tend to find more options available for the more expensive vehicles. Always check the depreciation rate (the amount of value a vehicle loses over time) for the type of vehicle you are after, and in particular the exact make/model you are looking for. The cost of the lease tends to correlate with how much value the car will lose over the lifetime of the lease. Lease companies will favour cars with lower depreciation, so it might be worth investigating buying instead of leasing if the car you are after tends to hold its value better than others. That way, you are the one who benefits when you come to sell the vehicle on.

Leasing is often used by businesses for their fleet of vehicles, or for company cars. Therefore, many lease companies advertise their deals excluding VAT. If you’re considering leasing and it’s not as a business expense, then make sure you budget for the full cost including VAT. In some cases this may mean adding 20% to the advertised price.

Both leasing and car financing will involve a credit check, which will be visible on your record. However, they may not always run a full affordability check, so always make sure you have budgeted for the monthly payments. Once approved though, making regular on-time payments can have a positive effect on your credit score, which may help you get approved for finance in the future.

Always make sure at the end of the lease you have a plan for obtaining your next vehicle. Handing the keys back means you’ll have nothing to show for the payments you’ve been making each month, and so you’ll need to know whether you wish to lease another vehicle, or buy another one when your current car goes back.

This depends on so many different factors. The closest alternative to leasing is to buy a car using Personal Contract Plan (PCP).

For more information on the different types of finance, see our article PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car?.

Much like leasing, with PCP, you have an initial monthly payment and then a fixed number of monthly payments. The main difference is that with PCP you have the option to pay a pre-agreed final balloon payment to buy the vehicle from the finance company. This is often called the Guaranteed Minimum Future Value (GMFV). Alternatively, you can simply hand the vehicle back. 80% of PCP contracts end with the car being returned, despite the option to purchase at the end, so it’s worth comparing total amount payable PCP vs PCH to see which works out the cheapest over the long term.

Regardless though, in terms of investment, leasing is usually the worst option available. This is because at the end of the term you are right back where you started; with no vehicle, but far less cash than before.

What if I can’t make the monthly payments?

If you really can’t make the payments, and need to hand the car back, speak to your finance company immediately as you may still be liable for the full cost of the lease. With PCH, as long as you have paid (or can pay) half the total cost then you are legally allowed to return the car. There may be early return charges though, so bear this in mind.

Alternately, they may be able to offer you an extension on the loan, which would effectively reduce your monthly payments.

With leasing, if you fail to make the payments, then the finance company can repossess the car without a court order.

With PCP, the lender can still repossess the car without a court order, but once a third is paid off, then they would require a court order to do so.

With either option though, always make sure you budget for the monthly payments for the lifetime of the loan.

On the surface, yes. When purchasing a vehicle you won’t be limited on mileage (unless taking out finance - see our article PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car? for more information), you don’t have to worry about keeping it in any sort of condition to return it, and you won’t have an approaching deadline for when you have to hand the keys back.

However, when buying a new car you will have to pay for the full amount in cash (unless financing), which can be a huge lump sum. Leasing will give you the option of obtaining a far more expensive car for far less initial outlay.

Also, when buying the car yourself, you will be subjected to the depreciation of that car. New cars, especially, have monumentally high levels of depreciation; with 20% being wiped off the value of the vehicle as soon as you take ownership, and most vehicles being worth roughly 50% of their sticker price after 3 years. Therefore, when calculating whether leasing or buying new is a better deal, always check how much a new car might be worth in 3 years' time (or however long you plan to have the vehicle), and calculate the depreciation cost. This will give you the total cost of ownership vs leasing.

When leasing, or financing, a vehicle, you will be bound by a strict timeframe; usually 2 to 5 years. At which point you may have to hand the keys back or pay a final balloon payment to keep the vehicle. Buying the vehicle outright means you choose how long you wish to have it for, and when you want to sell it on to make your next purchase. This is far more flexible. For example, you could decide to upgrade in 18 months if your personal or family situation changes, or on the flip side you could keep the car for 10 or more years if it still fits the bill. Buying a car will always give you the final say. There’s also the peace of mind factor that the car is yours, and no-one is coming to take it away. Sometimes that’s worth a lot in itself.

Before siging up to any new deal, whether buying or leasing, always check you have calculated and budgeted for the total cost of ownership. These 6 points are the main costs to consider.

Depreciation (when comparing leasing against buying)

Running costs. Fuel, insurance, tyres, brakes.

Leasing can be a very convenient way to get a brand spanking new smart set of vehicles, with limited hassle or liability when the vehicle requires maintenance. That said, it can often be the most expensive way to get behind the wheel of a car, so always be sure to budget for the total cost of ownership vs buying when deciding how best to go about getting your next car.

Lease4Less are one of the UK's biggest leasing companies and have some fantastic deals available. They have years of experience and so we would recommend checking them out before deciding which option is right for you.

Should you lease or buy your next car? - PCH vs PCP

When choosing your next car there are so many factors to consider. And even once you’ve decided which car you want, you suddenly get presented with your next dilemma: how to finance it.

According to the Finance and Leasing Association, 88% of new private cars bought in 2017 were paid for with some form of finance.

There are six main ways you can go about obtaining your next car. Hire Purchase (HP), Personal Contract Purchase (PCP), Personal Loan, Credit Card, Lease, Cash

HP is a very simple way of paying for a vehicle. You pay an initial deposit - usually around 10% of the value of the vehicle. You divide the remainder by the number of months in your contract (ie 48 months), add some interest - usually around 6-7% Annual Percentage Rate (APR) - depending on the market) and there you have your monthly payment. Keep an eye open for 0% finance deals too, this could save you thousands in interest over the course of the loan.

You won’t need to give the car back at the end of the period, so there’s no worrying about mileage or condition either. You will end up paying a great deal more than if you’d bought in cash, simply because of the interest, so it’s worth checking out the total amount to be paid before signing up. Also note, that until the term of your contract is up, you will not own the vehicle. This means you won’t be able to modify or sell it on until the end of the contract either.

PCP seems to be a favourite among dealers at the moment. It’s sort of a halfway house between hire purchase and leasing. Because dealers love this option so much you often get offered £1,000 or more off the purchase to take them up on it. Don’t be fooled, though, whatever they’re offering you, you’ll be paying more than that in interest over the lifetime of the finance agreement.

You will pay an initial lump sum - usually around 20% or so of the value of the vehicle. You will then be given set monthly payments for a fixed period, ie 48 months. 

The main difference is that when your fixed term ends you don’t own the car. Instead you’ll be given two options:

A pre-agreed final payment to purchase the car at that point - often referred to as the Guaranteed Minimum Future Value (GMFV)

Simply hand the car back to the finance company

The reason the monthly payments are considerably lower than for hire purchase is because the total amount paid is offset by how much the car is worth at the end of the agreement. The loan amount is essentially the cost of car plus interest, minus the deposit and the GMFV.

Many people opt for PCP because of these low monthly payments and knowing the amount you’ll have to pay to buy the vehicle at the end of the contract upfront is helpful for budgeting.

Be mindful that you will have to adhere to pre-agreed terms such as a mileage per year and final condition of the car. Go over the mileage, or try to hand the car back in a poor condition and you’ll be charged additional fees.

If you buy the vehicle at the end, then the total amount paid will be roughly similar to that of a hire purchase plan.

Many banks offer personal loans for things such as home improvements and new cars. This is one option to consider as the money is rarely secured against your property or vehicle and tends to come with much lower interest rates than car finance.

Because the loan is also not secured against the vehicle you’ll need to have a good credit rating to get a decent interest rate. One of the reasons car finance such as PCP and HP has such high interest rates is because of their leniency for poorer credit ratings and higher frequency of payment defaults.

Essentially, if you qualify for a personal loan, it might be worth considering over car finance.

Once received you can simply buy the car outright. Of course, you’ll still need to manage and keep up with the monthly loan payments

One huge plus side to both personal loans and car finance is that they can actually have a positive effect on your credit rating - as long as you keep up the payments. Apply for too many loans though and this’ll show up too and will have a negative effect.

Depending on your credit limit, you may be able to pay for the vehicle, either in full or in part, on a credit card.

If you have 0% on purchases for a fixed term this could be a great way to finance your vehicle without paying any interest. Just be sure to pay the full balance off before the interest free period ends. Otherwise you’ll end up paying huge levels of interest. Alternatively you may be able to transfer the balance to another 0% interest on purchases credit card, but this usually incurs a balance transfer fee.

One major benefit of buying on a credit card is that even if you put just a small amount on it, then you’ll be covered by Section 75 of the consumer credit act. This means that if something goes wrong with the vehicle or the purchase then your credit card company may be able to help.

Be aware though that some dealerships won’t accept credit cards due to the high transaction fees, which can no longer be passed onto the consumer.

With leasing you basically rent the car for a set period; usually 3 - 4 years. You will pay an initial deposit and then a set amount every month, like hire purchase.

One of the main advantages to leasing is that the car is always new, and is usually fully covered by warranty for the duration of the lease. Any issues or problems and you can rest assured it’s the problem of the lease company. Some packages also include servicing and vehicle tax as well. So shop around for the best deals.

The major difference between leasing and the other options is that you do not ever actually own the vehicle and at the end of the term you’ll have to hand it back. Like PCP, you’ll also have to abide by a pre-agreed number of annual miles, and the vehicle will have to be in good condition upon return.

If you have the capital available then buying a car outright with cash is a very good option. You’ll pay absolutely no interest on the price of the car, and you will have no monthly payments to worry about either.

You will need to have the full amount available in your account to complete the purchase. If your money is tied up in fixed-term savings accounts there may be a fee for withdrawing early.

Some people also have their money in Stocks and Shares ISAs so it may take a few days to a few weeks for your broker to sell your investments and return your cash to you. You’ll also stop earning any dividend payments your holdings may have been paying, and there will be no further potential capital gain on your investment.

It’s also worth noting that you have an ISA limit each year (currently £20,000 in 2019/20 tax year) and once you hit that limit you cannot pay into it until the next tax year. Therefore, think carefully before withdrawing from your ISA to pay for a car.

In summary, there's no right or wrong when it comes to financing your next vehicle, it just depends on your budget and financial situation at the time. Whichever option is best for you, don’t let the dealer persuade you. They’ll often have ulterior motives and will be pushing you towards the option that gets them the most commission.

And finally, haggle! Regardless of the method of payment, when buying a vehicle it’s always important to try to get as much off the price as possible. It’s factored into the sale price.

There’s always room for manoeuvre and the dealer would rather sacrifice a percent here or there to stop you walking out the doors and into the dealership across the road.

PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car?

Tag: finance

Should you lease or buy your next car? - PCH vs PCP

PCP vs HP vs Loan vs Cash vs Lease - What's the best way to buy a car?

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