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Is it cheaper to lease a car or buy one?

There’s a wide range of options when it comes to purchasing a car, so we’ve weighed up the pros and cons to help you choose the right option for you. Is it cheaper to lease a car or buy one?

Key points

  • Whether it's more beneficial to buy or lease a vehicle will depend on your individual circumstances
  • The way you drive and the vehicle you choose are both crucial factors
  • Do your sums with care and don't be swayed by sales talk

While new research from GoCompare has found that buying a new car outright is still the cheapest way, motorists are increasingly attracted to alternative purchasing options.[1]

Personal Contract Plans (PCPs) have grown to be hugely popular but car subscription schemes could potentially grab a sizeable chunk of the market. 

Leasing, hire purchase agreements and personal loans are other alternatives for those who want to get behind the wheel, but don’t have the cash to hand. 

Just remember that you’ll need to be able to manage your money responsibly and afford the repayments if you choose not to buy your car outright.

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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, such as the number of miles you drive and how well the car retains its value.

Generally, if a car has a good resale value then you're better off buying it. After three years you'd own a valuable asset, whereas with a leased car you'd have nothing.

But if the car plummets in value then it's probably cheaper to lease it, as you won't be bearing the brunt of the depreciation.

You can use websites like Autotrader to see the approximate value of your vehicle on the second-hand market.

Then you can work out how much those three years of driving will cost you and compare that to the price of a lease car.

Just don't forget to factor in the deposit you pay as well as the monthly cost. 

Personal loan

You can take out a personal loan with a car dealer, bank, building society or perhaps even a peer-to-peer lender. 

You apply to borrow a set amount with fixed repayments over an agreed term to settle the loan amount plus interest. 

The loan is ‘unsecured’ so it’s not connected to the car, your home or any other asset you own. Just make sure that you have read the terms and conditions before making a decision and that you're able to make your repayments comfortably. 

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Pros: 

  • Flexibility – You can choose the loan period (but, the longer the term of the loan the more interest you’ll pay) and borrow money to cover the whole cost of the car if you don’t have a deposit.  
  • Ownership – You’d own the car outright so, if needed, you could sell the car before the end of the loan period. You would still need to make your repayments though. 
  • Bargaining power – Gives you the power to haggle on price, especially if you’ve already got the money in your bank account.

Cons:

  • Credit history – The rate you’re offered depends on your credit history, so if you’ve got a poor credit rating you’ll have to pay a higher rate of interest and may find it harder to be accepted for a loan. Use our smart search tool to see which loans you're more likely to be accepted for, without impacting on your credit report.
  • Failing to make repayments – The lender can recover their money through the courts if you don’t regularly pay them back, which will affect your credit history.
  • Depreciation – You’re borrowing money to purchase a depreciating asset which could drop in value by 50-60% within three years.

Leasing

This is basically like long-term car rental – you won’t have an option to purchase the car at the end of the term, you just give it back.

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

Pros: 

  • Added extras – Leasing arrangements may include other costs, like servicing, tyres, tax and insurance. 
  • Changes – As there’s no buyout option, changing vehicles is easier under a personal leasing arrangement.
  • Depreciation – The cost of the car’s depreciation is the leasing company’s problem.

Cons: 

  • No ownership – No matter how long you lease the car for, you won’t own it, so you’re pretty much just hiring the vehicle. 
  • Fees – Mileage limits are imposed with penalties for exceeding it and there may also be fees for damage that goes above and beyond reasonable wear and tear.  
  • Base models – Just because a car is cheap, it doesn’t mean the monthly payment will be less. Cars that hold their value better may actually cost less per month than a base model. 

Personal Contract Purchase (PCP)

A finance company buys the car, while you pay a deposit and fixed monthly instalments for a set time period, usually between one and four years. 

Before the contract starts, the finance company gives the car a guaranteed final value (GFV), which you can pay at the end of your contract term – sometimes called a ‘balloon payment’ – to take full ownership of the car. 

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Alternatively, you can give the car back and use the value above the GFV (if any) towards the deposit for another car. 

Pros: 

  • Lower payments – You might end up paying less than other types of car finance, though this depends on the market. 
  • Options – You have the opportunity to drive a new car every few years or choose to own the car outright at the end of the term. 
  • Spread the cost – You can refinance the balloon payment to make it easier to pay off. 
  • Paid deposit – Some car dealers are keen to make a sale, so might offer to pay all of the deposit, meaning you’d just have to pay the monthly payments.

Cons: 

  • Know your limits – PCP contracts usually have a mileage limit and penalties apply if you exceed it.  
  • Depreciation – By the time the term ends, you might’ve only paid off the car’s depreciation, so you may not have any equity in the car and might have to start from scratch on your next contract. 
  • Fees – There may be fees imposed for any damage to the car, if it’s more than your standard wear and tear. 

Subscription

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Subscription is a relatively new concept similar to medium-term car hire, where everything except fuel and fines is included in one fixed monthly cost. 

While there are a range of new car models to choose from, the car itself may have been driven by another subscriber before you. 

An example of a subscription contract is a rental period of three months and after that it's renewable monthly. Alternatively, you can switch cars every three months.

Pros: 

  • Flexibility – It’s a relatively hassle-free option if you want to change your car regularly.
  • No depositCar insurance, breakdown cover and services are also usually included, so there’s not much else to worry about.

Cons: 

  • Higher costs – Flexibility is all well and good, but it could mean that the costs are higher than a basic longer-term lease.

Hire purchase

You’ll have to pay a deposit of typically around 5-10%, and then pay fixed monthly instalments over an agreed term which covers the purchase price of the vehicle (minus the deposit) plus interest.

Pros: 

  • Car ownership – At the end of the term, upon making the final payment, the vehicle is yours to keep. 
  • Paid deposit – Some dealers will be eager to make a sale, so they’ll contribute to the deposit, or pay it for you. 
  • Borrow more – Provided you meet the criteria, you may be able to borrow a larger sum of money than under a personal loan. However, it's important to make sure you can make your repayments. 

Cons: 

  • Collateral – The finance company ‘buys’ the car meaning that you do not own the car until the loan plus interest has been repaid.  If you fail to keep up with the payments, the lender can repossess the car.  
  • No sale – You are unable to sell the car until you’ve paid off the loan, but you can request an early settlement figure if you want to pay it off sooner.

Should I lease or buy a car?

"There are now more options than ever available to drivers looking to buy a new car", said Lee Griffin, founder and president of GoCompare. 

"In fact, there are several ways of having a car without owning it at all. Personal Contract Plans are still a popular choice but have become more expensive as residual values have fallen. 

"Leasing can get you into a new car at the lowest monthly cost, but the car is never yours to keep and now subscription schemes can provide flexible car ‘ownership’ for three months at a time with everything except fuel and fines included.

"When looking at your options think about what’s most important. Do you really want to own the car or just drive it for a few years or months then give it back? 

"Depreciation may be £10,000-£12,000 on a £25,000 car after three years, so you should factor that into your thinking too if purchasing was your first choice. 

"Do you want the hassle of selling the car yourself when you want to change it? And do you need a car all year round? Perhaps a car subscription service for six months is enough. 

"If you’re not great at taking care of a car you might leave yourself open to extra charges for undue wear and tear on a lease, subscription or PCP cars so watch out for those potential extra costs.

"It's important to consider insurance as the concept of ‘owner’ and ‘registered keeper’ can vary under the different options. For example, with leasing, the lease company may be the owner and registered keeper, not you.  As a result, you may find fewer insurers offering cover which can mean less choice and potentially higher premiums."

Gap insurance

If your leased car gets written off or stolen, the car insurance pay out might not be enough to repay the finance company what you owe - that's where Guaranteed Asset Protection (Gap) insurance comes in.

Gap insurance will cover the difference between what the insurance company pays out and what you still owe on a leased car. 

Bear in mind that you should weigh up the good and bad points of your options carefully before committing.

Last updated on 04 Mar 2019