Car finance vs leasing: Which is better?

Ready for a fresh set of wheels? If a car is top of your wish list, now’s the perfect time to start weighing up your options.
 
If you don’t want to buy a car outright – or don’t have the cash saved up just yet – the big decision to make next is to choose whether you go for car finance or leasing.
 
There are pros and cons to both; car finance can help you become the legal owner of your new pride and joy and split the cost into affordable monthly payments.
 
But, if you’re a real petrol head and love driving a brand-new model equipped with the latest tech every two years, leasing might be a better fit.
 
It all depends on your personal priorities and financial circumstances.
 
Not sure which way to go? Read on as we compare car finance vs leasing.

Got a specific question? Why not jump to:

• In a nutshell, what’s the difference between car finance and leasing?
• How does car finance work?
• What’s the difference between HP and PCP finance?
• How does car leasing work?
• What are the differences between both options?
• What are the pros and cons of car finance?
• What are the pros and cons of leasing?
• What other alternatives are available?
• How do I decide which right for me?

In a nutshell, what’s the difference between car finance and leasing?

The big difference between car finance and leasing is car ownership.
 
With car finance, you can eventually become your car’s legal owner. Whether you choose hire purchase (HP), personal contract purchase (PCP), or a personal loan, once you’ve made all your repayments (plus the one-off balloon payment in a PCP or the Option to Purchase fee for a HP agreement), the car could be all yours!
 
Leasing rarely ends with you becoming the proud owner of a new set of wheels. While buying the car can sometimes be an option if you’ve really fallen in love with it during your lease, in most cases, you’ll simply hand the car back to the lender and walk away at the end of your agreement.

How does car finance work?

Car finance is an agreement you’ll make with a lender to borrow money so you can buy a new or used car and spread the cost over a set period.
 
Keep in mind that eligibility criteria will apply and not every lender will agree to lend to every borrower. They each take different factors into account including your credit score, payment history, affordability, the amount you want to borrow, and your preferred loan term.
 
If you’re approved for finance, the next step is usually to put down a deposit – around 10% of the car’s purchase price is standard.
 
No savings pot? No problem! No deposit loans are available but will most likely come with a larger interest rate attached to them.
 
Most car finance agreements will last between one and six years and you’ll make a fixed payment each month including interest.
 
Depending on the type of finance you have, you might also need to agree an annual mileage limit and face extra charges if you exceed this or if you return the car with damage beyond fair wear and tear.

What’s the difference between HP and PCP finance?

Hire Purchase is one of the most popular ways to finance a car purchase. You’ll
typically put down a deposit upfront and then pay back the loan in fixed
monthly repayments for between one and six years:

• At the end of an HP loan, assuming you've made all your repayments, you’ll pay a    small Option to Purchase admin fee to become the car’s legal owner.
• HP loans can have higher monthly repayments as they lead to car ownership, but you won’t usually have to worry about an annual mileage limit.
• During the loan term, the lender will be the car’s legal owner so you can’t make any modifications or sell the car. 

Unlike HP, Personal Contract Purchase gives you options at the end of the agreement. You’ll pay a deposit upfront and then make fixed monthly repayments throughout the loan term, but PCP doesn’t have to lead to car ownership:

• When your PCP loan ends, you can make a large one-off payment to buy the car (known as the balloon payment), hand it back to the lender, or use any positive equity available as a deposit in a new deal.
• Instead of borrowing the car’s full purchase price, your loan payments will cover the difference between its current price and how much it’s estimated it’ll be worth at the end of your agreement (Guaranteed Minimum Future Value or GMFV).
• PCP can have lower monthly repayments than HP, but you’ll have to pay a large one-off balloon payment, usually equivalent to the GMFV, to become the car’s legal owner.
• An annual mileage limit will usually apply, and you’ll face an extra charge for every mile you go over it.

How does car leasing work?

Leasing – also known as Personal Contract Hire or PCH – is a lot like a long-term car rental.
 
Your lease will usually last between one and four years and you’ll pay a fixed monthly payment throughout this time. However, unlike car finance, you won’t usually have the option to become the car’s legal owner when the lease ends.
 
If you’ve fallen hard for your leased vehicle and can’t bear the thought of letting it go, some lease companies will let you buy it at the end of your agreement. But there are no guarantees and most leases end with you handing the car back and walking away. 
 
Like HP and PCP, you’ll probably have to put down a deposit upfront. The exact amount will depend on your agreement, but you might be asked to pay three, six, or even nine months’ worth of lease payments in advance.
 
Terms and conditions will also apply. Most leases come with an annual mileage limit (and penalty charges if you go over it) and you’ll need to keep the car in good condition to avoid extra costs.

What are the differences between both options?

The big difference between car finance and leasing is that one can lead to car ownership and the other won’t, but that’s not the only thing that sets these types of finance apart:

Mileage restrictions

Leases usually come with an annual mileage limit, but with HP loans, you can drive as far as you like.

Fair wear and tear

As you’ll be handing the car back at the end of your lease, you’ll need to keep it in good condition. With PCP, this only becomes an issue if you decide to hand your car back to the lender or use any available equity as a deposit in a new deal.

Depreciation

Car finance normally leads to car ownership, which means any loss of value (depreciation) could affect the price you can sell it for in the future. With a lease, you don’t have to worry.

More car finance guides

• What is Hire Purchase (HP) Finance?
• How Does Personal Contract Purchase (PCP) Car Finance Work?
• PCP vs Leasing: Which is Better?
• Hire Purchase vs Leasing: Which is Better?

What are the pros and cons of car finance?

If car finance sounds like it might be the right way forward for you, you might want to consider these pros and cons before you make your final decision:

What are the pros and cons of leasing?

If you’re tempted to lease a car instead of buying one on finance, here are a few advantages and disadvantages to help you make up your mind:

What other alternatives are available?

Personal Loan

Personal loans differ from other forms of finance as they aren’t secured against the car. Instead, you’ll become the car’s legal owner as soon as you use the loan to pay the dealership or private seller.

• As its legal owner, you can modify or sell the car during your agreement, just make sure you continue making your monthly loan repayments.
• The increased risk to lenders of issuing an unsecured loan means personal loans are often available only to people with strong payment histories and good credit scores.
• Monthly payments can be higher than other finance options.

Buying outright

If you have a pot of savings to draw from, you might be able to afford to buy the car outright in cash. You’ll be the car’s legal owner as soon as you hand over the money or make a bank transfer to pay the seller.

• Buying outright can be the cheapest way to buy a car as you won’t have to worry about paying any interest.
• You won’t face any mileage restrictions or terms and conditions. You can make any modifications, sell the car, or even give it away if you’d like – it’s completely up to you!
• As the car’s owner, you’ll have to consider depreciation (the value it loses over time), and it may not be very easy to change cars every few years.

Credit card

While buying a car with a credit card is more unusual, it is possible. If you have a card with a 0% interest rate and a high enough credit limit, you might be able to make regular monthly payments during the interest-free period to spread the cost of buying a car without facing extra charges.

• Not all dealerships will accept payment by credit card so your purchasing options may be limited.
• If the car meets certain criteria, such as costing less than £30k, you’ll be covered by the protections offered by Section 75 of the Consumer Credit Act. This means you can get your money back from the credit card company if the car has been misrepresented or there’s a breach of contract. For example, if you pay for the vehicle but the dealership fails to deliver it to you, you can contact your credit card company and get your money back.
• You might be able to get rewards on your purchase like cashback, air miles, or shopping vouchers, as well as enjoying the flexibility of choosing to pay more some months and less others.
• If you don’t pay off the full balance before the 0% interest rate period ends, you might face costly interest charges.

How do I decide which is right for me?

When it comes to choosing between car finance and leasing, there’s no right or wrong answer; the best option for you will always be the one that matches your personal priorities, needs, and budget.