Is it cheaper to lease a car or buy one?

There are 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.

Amy Smith
Updated 31 October 2019 | 4 mins read

There are lots of ways to drive 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.

Key points

  • Whether it's better for you to lease or buy a car really depends on your individual circumstances
  • With all the alternatives to buying outright, you usually pay more because of interest
  • You'll need to factor in how much value the car you want to buy loses - and how quickly
  • Do your sums, take your time, and try not to be swayed by sales talk

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 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 upfront, 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

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

Personal loans are pretty straightforward. You borrow for a set number of months, or years, and repay a fixed amount each month. Your repayments include the interest you’ll have to pay for borrowing.

Personal loans are usually ‘unsecured’. That means the debt you owe isn’t backed up by an asset you own – your home or the car for example. As with all borrowing, you’ll want to keep repayments affordable and be comfortable with the terms and conditions before committing.

Pros

Flexibility - You can choose the loan period and borrow money to cover the whole cost of the car if you don’t have a deposit. But, the longer the term of the loan the more interest you’ll pay

Ownership - You own the car outright, giving you the freedom to do as many miles as you need, make modifications, and sell the car on if you want to

Bargaining power - Having the money upfront gives you more power to haggle on price

Cons

Credit history - How much you can borrow, and the interest rate on your loan, depends on how good your credit score is. If you’ve got a poor credit history, you might find it harder to borrow and the interest rates you get offered will be higher

Use our smart search tool to see which loans you're more likely to be accepted for. It uses a ‘soft search’ so it won’t leave a mark on your credit history

Failing to make repayments - The lender can recover their money through the courts if you don’t keep up with repayments, which will affect your credit history

Depreciation - You’re borrowing money to purchase a car and cars lose value quickly - it could easily drop in value by 50-60% within three years

Leasing

Leasing is basically 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 and tax

Changes - As there’s no buyout option at the end, changing vehicles is easier

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 going over your preagreed mileage. There are usually fees for damage that goes above and beyond reasonable wear and tear too

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)

With PCP, a finance company buys the car. You pay them a deposit and fixed monthly instalments for a set time period, usually between one and four years – you don’t own the car.

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

You don’t have to buy it at the end of the term. You can give the car back, or part-exchange it for another, instead.

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

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 could’ve been driven by another subscriber before you.

Sucscription contracts tend to have 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 deposit - Car 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

With hire purchase, a finance company buys the car, and you pay them back for it. At the end of the hire purchase agreement, you own the car outright.

You’ll have to pay a deposit, usually around 5-10% of the asking price, and then pay fixed monthly instalments over an agreed term. The repayments cover 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

Bad credit - You’re more likely to be accepted for a hire purchase loan than a standard personal loan if you have a poor credit history. That’s because the loan is secured against the car – if you don’t keep up with repayments, they’ll take the car back. If that happens, it’ll do serious damage to your credit score though, so keep repayments affordable

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

Higher payments - Monthly payments are usually higher than for PCP and leasing deals

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.

"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?
"In three years, a £25,000 car can easily lose £10,000-£12,000 of its value so you should factor that into your thinking too if purchasing was your first choice."

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.

Do you need gap insurance for leased cars?

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.

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