Is it cheaper to lease a car or buy one?

There are lots of ways to finance a new car without buying it outright. Personal loans, subscriptions and personal contract plans (PCP) are just a few of your options.

But all of the alternatives mean either renting or borrowing with regular repayments towards the cost of your new car – so managing your money and keeping up with repayments is really important.

What's the difference between leasing, hiring and buying?

If you get a lease, you don't own the car. You won't have to pay a deposit up front and you give the car back at the end of your contract.

A hire purchase agreement is basically a loan. A finance company buys the car and you pay them back in installments. You don't own the car until you finish paying.

If you have a PCP contract, you pay monthly installments to cover the depreciation in value of the car, plus interest. You don't own the car until you've paid a balloon payment at the end of the contract. You don't have to pay it – you can hand the car back to the dealership at the end of the contract instead.

If you pay with cash, you own the car straight away. The same goes for personal loans – they're rarely secured against the car so you'll own it outright.

If you can't make the repayments, it'll negatively impact on your credit record and could lead to a County Court Judgement (CCJ). A CCJ could allow bailiffs to repossess your possessions to the value of the outstanding finance, but not necessarily the car.

How do I know if it's cheaper to lease or buy?

A lot of factors influence whether it's cheaper to buy or lease a car, but two of the big ones are your mileage and how well the car you want to buy retains its value.

Generally, buying a car outright is the cheapest way of owning a new car, as you'll only be paying the cost of the vehicle, without interest.

But if you don’t have the money up front, or you don’t want to pay a lump sum straightaway, leasing is an alternative. It probably won’t work out cheaper long term, but the payments are spread out, which can make it more affordable. It means you can always drive a new car, even if you don’t own it – every few years you can return the car for a new one.

Personal loan

With a personal loan, you borrow a set amount of money for a certain amount of time. Each month you repay a fixed amount of the money you borrowed plus any interest. These loans can be taken out via your bank, building society, peer-to-peer lender or car dealer.

You’ll own the car outright, so you won’t have a mileage limit, and you can even make modifications or sell the vehicle, as long as you keep paying off the loan. 

Having the money upfront gives you more power to haggle on price too, but cars lose their value quickly, so if you did sell it on you might not get enough to fully pay off any remaining loan amount. 

Leasing

Leasing is basically long-term car rental – you don’t own the car and won’t have an option to buy it at the end of the term – just give it back. So, the car’s depreciation is the leasing company’s problem. 

You usually have to pay a larger sum as the first payment and then lower fixed monthly payments for the rest of the term. 

The arrangement might include other costs, like servicing, tyres and tax. But there might be restrictions on the mileage. 

Personal Contract Purchase (PCP)

A PCP is where a finance company buys the car on your behalf. You pay a deposit and make set monthly payments for a certain time frame – usually between one and four years. 

You don’t own the car. There might also be mileage limits and charges if the car is damaged beyond standard wear and tear.  

The company sets a guaranteed final value (GFV) for the car – it’s sometimes called a ‘balloon payment’. You can take full ownership of the car at the end of the contract by paying off this amount, but you don’t have to do this. You can just give the car back instead, or part-exchange it for another one. 

Subscription

Subscription is a fairly new option. You pay a monthly cost where everything except fuel (and any fines you get for exceeding mileage or damage limits) is included. So things like car insurance, breakdown cover and services are usually included. 

The car might have been used by another subscriber (or several) before you. The minimum contract length is usually around three months and it’s renewable monthly after that. 

Hire purchase

You pay the deposit – around 5-10% of the cost of the car – and then a finance company buys the rest. You pay the company back (plus interest) monthly, and at the end of the contract you’ll own the car. 

Monthly payments are typically higher with HP than PCP, but some car dealers might be keen to make a sale and offer to pay the deposit for you. If you don’t keep up with your repayments, the company owns the car, so they can repossess it. 

Should I lease or buy a car?

Choosing whether to lease or buy your next car depends on your financial situation and what you want to drive.

If you like driving a new car, and want to keep driving new cars, leasing might be a better option for you.

If you want to keep hold of it for more than a few years, buying outright will work out cheaper. There’s no borrowing, or interest, and you can sell it whenever you want.

Do you need gap insurance for leased cars?

If you use finance to buy a car, and it gets written off or stolen, it’s unlikely your insurer will pay out enough for you to repay the finance company what you owe – that’s because insurers only pay out the ‘market value’ of your car at the time of the incident.

Because new cars drop value sharply in the first few years, you can easily come up short. That's where Guaranteed Asset Protection (Gap) insurance comes in.

Gap insurance covers the difference between what the insurance company pays out and what you still owe on the car.

There are a few different types of Gap insurance, and there can be exclusions to the cover you’ll need to look out for - do your research before committing, and don’t be pressured into buying it straight away at the car dealership.

Is car insurance included?

Car insurance isn’t usually included when you finance or lease a car. It is if you use a subscription service though.

You'll need to arrange appropriate cover for the vehicle before you can drive it.

There’s no difference between car insurance for a car you own or a car you’ve financed or leased. It’s worth comparing insurance for a few different models before you commit to a finance plan – you want to know that it's going to be affordable alongside your repayments.

Sometimes, you’ll be expected to take out fully comp cover, particularly if you’re also taking out a Gap insurance policy – your dealership will let you know if that’s one of the terms of your finance agreement.