Buying vs Leasing

By Lewis on 9th December 2016 - View Comments

Puzzled about if it’s cheaper to lease a car or buy one? Could leasing a vehicle be a better option for you than buying one outright? Find out more with this guide.

Key points

  • Whether it’s more beneficial to buy or lease a vehicle will depend on the individual circumstances
  • The way you drive and the vehicle you choose are both crucial factors
  • Do your sums with care and don’t be swayed by sales talk

When you’re in the market for a new car, there are a lot of decisions to make:

  • Should you buy with cash? Buy with finance?
  • How about leasing a car for a fixed period rather than buying one?
  • How can it be cheaper to lease a car?

It’s worth considering whether it might actually be cheaper to lease your vehicle, even though that means you won’t own it outright and will have to hand it back when you’re finished. One thing to get clear from the start is that this is not a general rule.
Some drivers can save money by leasing their vehicle instead of buying it, while for others it will be far cheaper to buy it with finance.
Admittedly it does seem pretty counter-intuitive that it can be cheaper to lease a vehicle, after all, if you buy a car then you have a car. You can continue to drive it or sell it, whereas at the end of a lease you have nothing. But you need to factor depreciation into your sums.

If the gap between the price of your new vehicle and its value after three years is more than it would cost to hire a car during that time, then you’ve potentially lost out.

How do I know if it’s cheaper to lease or buy?

A lot of factors influence whether it’s cheaper to buy or lease a car, such as the number of miles you drive and how well the car retains its value. If it appreciates, buy it and if it depreciates, lease it.

For example, Which? looked at some specific car models and found in its analysis that, while a VW Scirocco was worth 63% of its original price after three years, a new Ford Mondeo was typically worth just 36% of its initial value.
Because of that, the survey suggested that most people would be better off buying the VW Scirocco on finance, but leasing a Mondeo.

As a general rule, if a car has a good resale value then you’re better off buying it. After three years you’d own a valuable asset, whereas with a leased car you’d have nothing. But if the car plummets in value then it’s probably cheaper to lease it, as you won’t be bearing the brunt of the depreciation.

Points to note:

  • Look at the price of your new car and its predicted resale value after three years.
  • If you’re driving an unusually high or low number of miles then factor that into your sums.
  • You can use websites like Autotrader to see the approximate value of your vehicle on the second-hand market.
  • Then you can work out how much those three years of driving will cost you, and compare that to the price of a lease car.
  • Just don’t forget to factor in the deposit you pay as well as the monthly cost.
  • Remember that most leasing companies restrict the number of miles you can do in the car in order to protect their investment. That means you’ll be charged extra if you exceed that agreed annual mileage.

Do you need a new car every three years? If you don’t plan to sell your new car any time soon, then you could be better off buying it. After all, once you’ve paid for it you can continue driving it and not pay any monthly amount for your motor.
However, if you’ve only leased a car then you’ll need to either buy one or continue leasing one once you’re done.

What about a personal contract plan (PCP)?
There is a sort of middle ground between buying and leasing a car. A personal contract plan means you pay a deposit then pay monthly instalments, but you also owe a ‘deferred payment’ at the end of the contract if you want to keep the car.
When the contract ends, you have a choice. You can hand the car back to the dealer without making the deferred payment, leaving you with no car but no debt either. Or you can make the payment and keep the car.

An option is to sell the car privately to repay the final amount owed – if the car is worth more than the debt then you can pocket the difference. That gives you some flexibility over what you pay; if the car has kept its value then you can keep it or flog it, but you won’t pay more than you agreed at the start of the deal. If the car is worth less, you can simply hand it back.

If you return the car it has to be in good condition. You’ll also be asked to estimate your miles at the start of the contract – you’ll have to pay a penalty if you’ve exceeded that. Bear in mind that PCPs are usually more expensive than hire purchase deals, with larger deposits and monthly sums. You pay for flexibility, meaning that PCPs are unlikely to be the cheapest option.

Does leasing affect your car insurance?
Most insurers are happy to provide cover for a leased vehicle, as this really isn’t an unusual way of paying for a motor.
But you do need to make sure you have sufficient insurance; the leasing agency is likely to demand you buy fully comprehensive cover rather than just third party. After all, they need to know that their asset is protected.
Remember, whether you’re leasing or buying, one definite way to keep the price of running a car down is to compare car insurance quotes.

Dealer finance There are three main types of finance a dealer is likely to offer: Hire purchase (HP)   This is secured against the vehicle itself and you do not own the car until you have made the final payment – you can’t sell it without the lender’s permission, although you can return it. You typically pay a deposit (often 10%) and then repay the balance in instalments, plus interest, over the loan period. At the end of the loan period, you own the car outright. Be aware that: the car can be repossessed if you miss a payment. It can prove more expensive than an independent bank loan. Servicing may be included, but check all terms and conditions.

Personal contract purchase (PCP) This typically involves paying a deposit then low monthly instalments over a fixed period. At the end of this, you can either pay a lump sum (‘balloon payment’) to purchase the car outright, return the vehicle or sell it privately to pay off the remainder. This suits people who want to change their car frequently, and is based around a ‘minimum guaranteed future value’ (MGFV) for the car. Be aware that: it’s important to stick to the agreed mileage limits and to keep the car in good condition to avoid penalties. You are hiring the car and will not own it until the balloon payment is made. It may be less cost-effective than HP if you plan to keep the car, however.

Personal leasing (contract hire) This is like a PCP, again with low monthly payments, but you have no option to buy the car. However, it is convenient and it’s easy to change the car. The type of car, length of contract and agreed mileage limits determine the overall leasing cost. You normally have to pay up to three months’ rental in advance. Be aware that: although servicing may be included, a large upfront deposit is usually required. Again, mileage limits may apply. Make sure you compare deals taking into account APR, the monthly payments over the loan period, and the total amount repayable, as well as any further ‘option to purchase’ and administration fees. 0% finance ‘0%’ deals are often offered, usually to shift an outgoing or slow-selling model. These can work out affordable, with no interest charged on your monthly repayments. Bear in mind that they typically require a large deposit (35% or more) and that you’ll be unlikely to negotiate any further discounts. And if you miss any payments, you’re usually switched to a scheme with a higher interest rate.

Additional extras Dealers also make commission from additional insurance and other products that they may offer as a package with the finance plan. These typically include:

  • Gap insurance or ‘asset protection’ – This covers the ‘gap’ between the current market value of your car and the value of your outstanding loan or the cost of replacing your car, should it get stolen or written off.
  • Minor damage insurance – Additional insurance covering scrapes and cosmetic damage, which could affect the guaranteed value of your car when you come to return it at the end of a lease plan. You may also be offered separate cover for alloy wheels and for tyres, perhaps as part of a ‘bundle’ of policies.
  • Invariably, these products are more cheaply bought independently, should you wish to buy them, from a third-party provider.

For further information you can read more here.

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