Hire Purchase Vs Leasing
The main difference between Hire Purchase (HP) and leasing is in regard to ownership. With the former, monthly payments and an optional purchase fee can be paid, at which point you will own the car. With the latter, you’ll only be paying for the depreciation of the vehicle over the course of your contract and at the end you won’t be able to own it.
What is hire purchase?
Hire purchase is a finance option for people who are looking to own a new or used car, but don’t want to pay a large sum outright in order to get behind the wheel.
Dealerships and online brokers offer HP finance, the former of which can offer subsidised 0% APR representative because of their ties to the individual manufacturers. However, you will need an excellent credit score before being approved for this type of offer.
A non-refundable deposit of around 10% is required at the start, which is then followed by monthly hire payments over the course of 1-5 years.
At the end, an ownership fee of around £100-£200 is needed before you have completely paid off the finance. At this point, the car is yours to sell or continue to own.
What is leasing?
Car leasing is long-term rental of a brand-new vehicle for an initial rental fee and fixed monthly payments over a period of a few years, though this can be longer or shorter.
At no point will you own the vehicle. Once all the payments have been made, the vehicle will be collected, after which you decide whether you want to walk away or take out another deal on a new model.
You will need to choose an annual mileage allowance for the vehicle, the total of which will be checked at the end by an inspection agent. As long as the car is kept in a good condition and doesn’t exceed the agreed mileage cap, you won’t have anything more to pay.
Hire purchase or leasing – which is right for me?
Hire purchase is one of the oldest forms of finance for purchasing a vehicle, like a traditional bank loan. Although it isn’t as popular as the likes of Personal Contract Purchase (PCP), which tends to have lower monthly payments, there are still plenty of advantages to be had from a HP agreement that will interest those of you looking to own a car.
On the other hand, leasing is a much newer concept, allowing drivers to hire a new car every few years for affordable monthly payments, without the option of ownership.
Now that you know what comprises a lease deal and HP agreement, which one is best for you?
How much can I afford each month?
Because HP monthly payments cover the total cost of a vehicle, allowing you to own the car at the end, the monthly hire price will usually be more than if you were to lease the same car.
There’s also fluctuating interest rates to consider with HP, due to it being a loan for a vehicle. Shorter agreements, such as one year, will be subject to much higher interest charges than a longer contract. This can be as low as 2.8% or as high as 15% and will also depend on the credit score of the person applying for finance.
Lease monthly payments cover the depreciation of a new car, with annual mileage, contract length and the model all being taken into consideration by the provider, who calculates the future value of the vehicle at the end of the deal based on this information. As such, the main bulk of hire fees will be less with leasing.
Can I afford a balloon payment?
A HP deal is designed for people who are certain they want to own a vehicle after paying fixed monthly hire payments.
Unlike the final optional ‘balloon payment’ on a PCP agreement, which pays off the remaining debt owed to the dealership or provider, the final purchase fee for Hire Purchase deals are a fraction of the cost. This is because a substantial amount of money borrowed for a vehicle on PCP is left until the very end of the deal, with monthly payments financing depreciation of the car, rather than its full value, such as with HP.
If you lease a vehicle, you won’t have a fee at the end to take ownership, but there are extra charges, such as excess mileage or damage beyond fair wear and tear which could result in even more of a charge.
What’s my mileage?
Predicting exactly how many miles you’re going to drive each year isn’t easy to do. Even when you work out an average, you’ll often want to throw in an extra 1,000 more or so for potential emergency trips. But then you wind up paying more each month for something you may not even use.
Hire Purchase is often criticised for its lack of flexibility, most notably when it comes to having no option but to own the car at the end. However, use of the vehicle is arguably more flexible than the likes of leasing and PCP finance in that you won’t need to declare an annual mileage cap.
A broker, lender or dealership doesn’t consider the Guaranteed Minimum Future Value (GMFV) of a car financed on a HP agreement. Instead, the whole cost of the car is being financed, as opposed to leasing, whereby payments cover depreciation over the course of your contract.
So, you’re free to drive the vehicle as much as you want, without having to worry about potential excess mileage charges at the end.
Leasing is considerably different as you are required to agree a fixed yearly mileage and stick to it. This will range from 8,000-30,000 miles, the total of which will be worked out at the end of your deal, not each year you have the car. It’s important to be honest in your judgement of how much you distance you intend to cover in the car to avoid an additional charge at the end. This can be costly, with a rate per mile often between 5p to 30p but will differ depending on the finance provider funding the deal.
High mileage lease deals (50,000+ miles per year) are available, although there is always a limit to how much you can do in the car. So, if you think you’re going to drive more than the permitted allowance, leasing perhaps isn’t for you.
If you’ve paid 50% or more of your HP finance, you’re able to return your car. This is called a ‘Voluntary Termination’ agreement, which will mean the rest of the monthly payments will be cancelled.
You can also do this in one lump sum if you’ve not quite paid off half of the finance, which is known as a settlement figure.
Remember: if more than 50% of the finance has been paid, you won’t be able to get a refund for the extra amount paid if you decide to cancel the agreement.
A lease agreement can only be ended early if you pay a pricey termination fee, which will often be much more than the total remaining finance on your deal. So, it’s best to only choose a contract length and monthly price that you can commit to.
Now that you’ve compared leasing and HP finance, why not check out what leasing looks like against PCP in our other guide.
For more information on leasing, visit our guides page.