Leasing Vs PCP – Which Is Better?
Whichever method you use for getting your next car, what matters is you get the best deal for a model which suits your lifestyle.
Two popular options of vehicle finance are leasing (also known as Personal Contract Hire or PCH) and Personal Contract Purchase (PCP). Both involve long-term rental of a new vehicle, with the latter also offering deals on used cars too. Leasing doesn’t give you the option of owning the car at the end, whereas its opposite number does, albeit for a lump fee at the end of your deal.
Want to find out whether leasing or PCP fits your motoring needs better? Read our guide for everything you need to know before deciding.
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What is leasing?
As we mentioned before, leasing requires you to pay a set monthly fee for use of a brand-new car every 2-4 years.
Most major manufacturer and model of car is available when it comes to a lease deal. Once you’ve searched for your ideal car, or found it using your monthly budget, the process can be broken down into the following steps:
- Choose how many months deposit upfront you want to pay (one, three, six or nine months’ worth), how many miles you intend to drive each year and how long you want it for (anywhere between 8,000-30,000 miles per year).
- Compare deals from multiple providers for your chosen car if you’re using an aggregator or use lists from one provider to find the best offer.
- Enquire about leasing the vehicle – you can specify a time which is best to contact you and arrange final details, along with a mandatory credit check.
At the end of your contract, you simply hand the lease car back to the leasing company and either take out another deal on a new model, or you can walk away.
What is PCP?
PCP finance deals are another option to consider when looking for a new car. Unlike PCH, it’s is slightly more technical and take some understanding, but we’ve got you covered.
On the face of things, both deals are fundamentally the same. You go to the provider or online retailer and select the car you want. You then pay a deposit, agree on set monthly payments and interest rate, sign the contract and away you go.
Where the two differ is with regards to the final payment.
With PCP, not only is there a deposit at the start of the agreement, but also a balloon payment at the end. This only applies if you choose to purchase the car at the end of the contract.
Even if you don’t have any interest in owning the car at the end, you’ll still agree this final settlement fee at the start.
The lump sum is determined by the finance house at the start of a deal, who will calculate the GMFV (Guaranteed Minimum Future Value) of your car at the end of the deal. The monthly payments for your deal is the difference between the car’s retail price from when you first receive it and its end-of-contract value.
Is leasing or PCP for me?
There are several factors you should consider which will help you decide which option is right for you.
How you plan to use the vehicle, whether you want to own it and your monthly budget will all give you an indication of which type of deal you should go with.
Not everyone has the typically British sentimental viewpoint that it’s best to own everything outright. In the same breath, the continuous commitment of paying a monthly fee for a new car isn’t feasible for others.
This is where PCH and its counterpart come to a crossroads.
Owning a motor comes with the burden of depreciation, meaning you’re going to get much less for your old faithful when it comes to selling up than you first got it for.
Current rates suggest that the value of a new car can drop by 20% after the first 12 months. Things don’t look much better for the next four years you have with the vehicle, either, with an average dip of 10% per year expected.
Should you wish to lease a car, depreciation won’t be your concern. At the end of your agreement the keys go back to the provider and it’s then up to you to decide if you want a new model or if you want to walk away.
Another thing to consider is the cost of your insurance quote price. With many new vehicles getting smaller, fuel-efficient engines in a bid to meet EU emission standards, you’re likely to get a cheaper premium for each new motor you lease. Some insurers even go as far as offering new car discounts.
It’s not all doom and gloom if you want to own a car though. With used car finance on PCP deals, you could still get the benefits of a new-ish vehicle without losing out on first-year depreciation.
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Many people realise that modern vehicles aren’t like their predecessors. Repairs and maintenance are much more expensive than they used to be because of the higher cost of acquiring car parts and the overriding complexity around building each individual model.
As such, leasing offers you the opportunity to use a new vehicle which is covered by the manufacturer’s warranty for mechanical and electrical issues, provided they didn’t occur as a result of driver error.
On the other hand, regular maintenance can save you a lot of hard-earned money, meaning you can avoid the garage at all costs. So, if you have a dream car in your mind which you want to own, maintain and drive how you wish, PCP lets you work towards this for monthly payments you can afford.
Generally speaking, PCP costs more over the course of a contract when compared with leasing. This is because there’s extra flexibility involved with the former, such as no-deposit deals, new and used cars available and, of course, the ability to own the vehicle for a one-off balloon payment.
Many people take out PCP deals and treat them like a PCH, opting not to exercise the final payment to own the car. While having an additional option there can be an attractive offer, it’s worth thinking about whether you want to own the car before signing any contract – this way you can avoid overspending.
Depreciation is factored into the cost of your lease deal. So, if you drive fewer miles and specify this in your agreement, it’ll wind up being cheaper.
PCP involves borrowing a car’s total amount, with interest being paid throughout for people who intend to own the car at the end.
There’s no doubt that PCP offers the most flexibility out of the two, which can be a dealbreaker for certain drivers.
For example, you have three options at the end of a PCP deal, compared to leasing’s one.
At the end of a PCH deal, the car goes back to the finance company, without anything more to pay (provided you’ve kept the car in good condition and stuck to the agreed mileage cap).
It’s not as straightforward if your car is on the alternative method of finance. You have the following options:
- Return the car to the dealership or provider with nothing more to pay (provided there’s no damage in excess of fair wear and tear and you’ve stuck to the agreed mileage cap).
- Pay the optional final fee and own the car.
- Trade in the car with a retailer in order if the price is more than the GMFV – the difference can then be used as a deposit for your next car.
It may be that you’re dead certain that you don’t want to carry on using your new car. The idea of ‘usership’ for consumables has increased in popularity in the past two decades, with phone contracts and finance options for electricals a sure way of getting the latest product for a monthly fee which fits your budget.
Cars are no exception, either. Simply put, owning a car comes with responsibilities which most people don’t want to spend their time or money on.
Repair and maintenance costs are the biggest part of this, which can become frequent and more expensive the older your car gets. As such, what happens at the end of the deal to the car becomes less of a concern to you when you’re leasing.
PCP and lease agreements differ when it comes to allowing you to walk away from a deal without seeing it through to the end.
Your circumstances, both personal and financial, can change throughout the course of 2-4 years which could mean that you’re unable to make the monthly payments originally agreed.
This is where PCP gets much of its appeal from. As long as you’ve paid 50% of the total finance on a deal back to the finance company, you have the option to walk away.
Remember: this includes half of any interest, additional fees and the final balloon payment.
Unfortunately, PCH doesn’t allow you to walk away from a deal at any point of the contract. However, this doesn’t mean that you’re automatically going to be fined to the hilt by the funder.
On the contrary, you could be made redundant mid-agreement, for example.
You’ll be glad to know that there are actions you can take if you find yourself not being able to afford your monthly payments anymore.
Early termination of a lease deal comes with significant charges, which will likely cost you even more than seeing out your original agreement. However, we would advise calling the leasing company or provider you ordered the car from to notify them of your circumstances – the earlier you do this, the greater the chance that something can be worked out.
Some providers may be able to extend your deal in order to reduce monthly payments.
Another way they could make the cost manageable is by letting you ‘trade down’. This is when you trade your current car for a cheaper model in order to bring down the cost. The outstanding finance for the older car will still need settling, however this will be carried over to your new vehicle’s deal.
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Want to find out more about leasing? Then check out our other guides for all the information you need before making your decision.