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Car Finance vs Car Leasing: What’s the Difference?

March 18, 2016

On the hunt for your new car, it can be hard to know which of the various options is best for you. If you’ve got the cash, you could always buy it up-front – but for those of us who’d rather drive now and pay later, or simply don’t have the budget to buy outright, there are a bunch of alternative options out there.

Buying cars on finance means we can own the model we want by making a series of monthly repayments, but car leasing deals are known to come with cheaper payment plans – so how do we decide which road to take?

You’ll find out everything you need to know today, from the pros of private car leasing to the benefits of buying your new vehicle through PCP car finance.

 

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Car leasing

If driving the car is more important to you than owning it, private car leasing could be the ideal option for you. This way, you can ‘rent’ the car on a long-term basis – making one up-front payment, followed by a series of smaller ones on a monthly basis and over a fixed period of time.

Personal contract hire (PCH)

This kind of long-term rental plan gives you an opportunity to drive the model you want without ever actually owning it. When it comes to contract hire and leasing in general, you’ll simply need to return the vehicle once your agreed period is over – or arrange a new contract on another car, if you’d prefer.

Pros:

  • Lower monthly payments compared with buying a car
  • Minimal hassle, with the opportunity to drive away without thinking about re-selling or warranties
  • Flexibility, in that you can swap models easily without having to meet the up-front price tag

Cons:

  • You won’t be able to buy the car once your plan ends
  • Comprehensive car insurance isn’t covered by your contract, so you’ll need to arrange this separately
  • A rough mileage estimate will need to be agreed at the start, and you may have to pay extra if you surpass this limit

Car finance

Car finance deals are the more affordable path to car ownership. As with private car leasing, you’ll be required to make a number of monthly payments over a pre-agreed period – but this way, you’ll have the chance to buy the car outright once your full term is complete.

Hire purchase (HP)

A hire purchase agreement involves an initial deposit, followed by a series of monthly payments – through which you pay off the total value of the car in question. After your repayment period comes to an end, you officially own the vehicle.

Pros:

  • You can drive away without having to buy the car up-front
  • Once your final monthly instalment is paid, you’ll own the car
  • You won’t need to agree an approximate mileage estimate, meaning you can avoid any excess charges in this respect

Cons:

  • Since you’re paying off the total value of the vehicle, monthly repayments will likely be higher than the alternatives
  • Unless your car finance agreement has been settled, you won’t be in a position to sell the car on

Personal contract purchase (PCP)

Similar in essence to a hire purchase agreement, PCP car finance also consists of an initial up-front payment followed by a period of fixed monthly instalments – the difference being that, this way, you’re paying off the car’s depreciation rather than its total value.

With PCP car deals, your car’s Guaranteed Future Value (GFV) is roughly calculated – meaning that you’re paying off the difference between its current and future value. These car finance deals generally mean lower monthly repayments – but there’s a trade-off, in that you’ll need to make one final balloon payment at the end in order to own the car outright. Alternatively, you can choose not to pay this and simply return the vehicle.

Pros:

  • Monthly payments will be lower, versus a hire purchase agreement where you’ll pay off the car’s total value
  • As with PCH, you won’t have to worry about re-selling or warranties when you drive away in your new car
  • If your car is worth more than the GFV, this equity can go towards the deposit on your next vehicle
  • With PCP deals, you have the option to simply walk away once your monthly payments are complete

Cons:

  • Similarly to PCH, a rough mileage estimate will need to be agreed at the start of your contract
  • You’ll need to make a final balloon payment in order to buy the car outright

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Whether you’re on the hunt for the best car lease deals or prefer the sound of PCP car finance, the key is to find an agreement that suits your circumstances. From monthly repayments to opportunities for car ownership, there are a number of factors to consider before making your decision – and it all depends on what you’re looking for in the long term.

For access to the best car finance deals, contact The Car Loan Warehouse team. Our experts are fully versed in the finer details of each option and can help you make an informed decision today – with applications approved in 60 minutes or less.

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About The Author

Jon Le Roux is co-founder and company director of The Car Loan Warehouse. Being a mad engineering and motorsport enthusiast, I spend more hours than is healthy, watching, reading or talking about cars, boats, motorbikes…..basically anything with an engine.