Car finance vs leasing: Which is better?

If you're considering how to fund your next vehicle, understanding the differences between car finance (HP and PCP) and leasing (PCH) will help you make the right choice. Both options have their pros and cons, and the best option depends on your personal needs and budget.

What’s the difference between car finance and leasing?

The biggest difference between the two is ownership. 
Car finance allows you to work towards owning the vehicle.

Whether through Hire Purchase (HP), Personal Contract Purchase (PCP), or a personal loan, once you’ve completed all payments, including any final balloon payment, you’ll have the option to become the car’s legal owner.

Leasing, on the other hand, generally means you never own the car at any point. At the end of the lease term, you simply return the vehicle and can either walk away or start a new lease with a different car.

Car finance explained (HP & PCP)

Car financing is an agreement made with a lender, helping you to spread the cost of a new (or new-to-you) vehicle. Factors like your credit score, payment history, and the amount you want to borrow will influence the terms offered. After a deposit (usually around 10%), you’ll make monthly payments before either taking ownership or upgrading to a new vehicle.

Hire Purchase (HP): You make a deposit, followed by monthly payments for one to six years. At the end of the term, you pay a small "option to purchase" fee to become the car’s owner.

Personal Contract Purchase (PCP): With lower monthly payments than HP, this option offers more flexibility at the end. You pay for the car’s depreciation (the difference between its current value and the estimated future value, or GMFV), and at the end of the term, you can either pay a larger final balloon payment to own the car, or return it and walk away. We’ve explained PCP in more detail here.

Both options typically come with restrictions like limited mileage or prohibitions on modifications, because the car doesn’t belong to you - yet!

Leasing explained (PCH)

If you’re sure that ownership is not for you, Leasing or Personal Contract Hire (PCH) could be your best option. It involves fixed monthly payments after an initial deposit. The term typically lasts between one and four years, and at the end, you can either return the car or start a new lease with a different vehicle. Since you never own the car, there are no concerns about depreciation or long-term maintenance.

Car finance vs leasing: Key considerations

When deciding between car finance and leasing, consider the following:

• Ownership: Do you want to own the car eventually, or are you just looking to use it?
• Upfront Costs and Monthly Payments: How much can you afford for a deposit and ongoing payments?
• Flexibility: Do you want to keep, swap, or return the car at the end of the term?
• Mileage and Wear & Tear: Some contracts are more restrictive than others. Make sure you understand any limits.
• Long-Term Cost: Which option fits your finances in the long run?

Which option is right for you?

The right option is always the one that fits your budget and long-term goals best, so no one answer fits everyone.

Car finance (HP or PCP) is ideal if you want to own the car eventually, or if you think you might want to.

Leasing could be better if you prefer to drive a new car every few years and avoid ownership responsibilities, such as depreciation or maintenance.