There are a few different ways to finance a brand new car or van. You may have considered a PCP or a hire purchase, but have never really understood what the difference between the two is. Another option to add to the mix is leasing, and with every finance method having its differences – it’s important to understand these! Once you fully understand the different options, it will become much easier to decide which finance option is the right one for you.
What Does Leasing Mean?
Car leasing is also commonly known as Personal Contract Hire (PCH). For a car lease, you will choose an upfront payment amount (either one month, 3, 6, 9 or 12 months upfront); you will choose the term length of the lease, and you will choose your annual mileage amount. Then you will pay fixed monthly amounts for the length of the lease term that you have decided.
You can think of leasing as a similar concept to renting a property. You pay a deposit or upfront amount, and then pay monthly payments for the length of the lease. Similar to the landlord owning the property, with car leasing you do not own the car or buy it at the end of the contract – you simply hand it back! The landlord will usually inspect the flat, as well as the leasing company for the car. As long as your car has not gone beyond the BVRLA guidelines to acceptable wear and tear; and that you have not gone over the agreed mileage amount, there will be no further costs.
What Does PCP Mean?
PCP stands for Personal Contract Purchase. PCP is a way of financing your vehicle as opposed to buying it outright. PCP financing can be broken down into three parts; the deposit, the monthly payments and the choice at the end.
For the deposit, you will pay a sum at the beginning before you get the car, which you can choose how much you would like to pay and then the monthly payments will be calculated from the deposit paid, mileage amount and the balloon payment at the end.
At the end of the agreement, there are a few options with a PCP. The first option is to keep the car to own and pay the balloon payment, which is a lump sum that you can pay in one go or re-finance the amount. The second option is to simply hand the car back with nothing to pay. The final option is to part exchange your car and you can use any equity as a deposit on another vehicle.
What Does HP Mean?
Hire Purchase (HP) is a way of financing a car where you will usually pay an initial deposit and then go on to pay off the entire value of the car in monthly instalments. At the end, once all the instalments have been made, then the HP ends and you will own the car. This is another popular way of buying a new car as essentially you are hiring the car, while paying for it, to purchase it at the end of the deal.
The amount that you choose to pay upfront will determine the amount of the monthly instalments, and the interest is calculated at the start of the agreement and added to the finance deal. This means that the payments are fixed during the agreement. The deposit for a HP deal will usually be around 10% of the total value of the car, although similar to leasing and PCP finance, the customer can choose to pay more or less upfront to best suit their needs.
What's The Difference Between Leasing, PCP And HP?
It can be a bit confusing to understand exactly what differentiates each finance option and how they all work. We outline the main differences between PCP vs leasing and HP for you to help you decide which method of financing your car is right for you.
Owning the car
With a car lease, you never own the car, and will never get an option to purchase it at the end. You simply hand back the car and can take out another lease deal (if you’re organised you can get a new car delivered the same day your old one is getting picked up!) With a HP deal, you are paying the car off in monthly instalments and will own it at the end of the contract. The major difference between PCP and HP is that with a PCP deal you will get the option to either buy the car with a final balloon payment and own it, or hand it back instead.
Mileage allowance
With both leasing and PCP, there are mileage allowances. For a PCP, the lump sum at the end is calculated at the end based on what the estimated value of the vehicle is from the mileage you have stated that you will do over the PCP deal. Leasing is similar and the monthly payments are calculated based on how many miles you have stated you will do over the term. With HP you are not tied to mileage limits as you are buying the car in instalments.
APR rates
The Annual Percentage Rate (APR) interest rate is something you will need to consider if you are getting a PCP or HP deal, that you wouldn’t have to with a car lease. This interest rate is calculated as you are borrowing money from the funder to finance the car as opposed to buying it outright. The APR rate on a PCP will usually be around 4-8%, although it can be higher so always best to double-check. For a car lease, any interest rates are usually already calculated into the monthly payments. Leasing companies usually won’t show this on the contract but if you’d like to find out you can always ask them. This interest rate is calculated from the car you are paying for, the term length and your credit rating. It is possible to get a deal with no interest, but you would usually have to pay a higher deposit for these.
Monthly payments
The monthly payments will tend to be the cheapest with leasing as it is all about the depreciation of the vehicle. The payments are the cheapest, although you do need to agree on an annual mileage and there is no option to buy the vehicle. With HP and PCP contracts, the monthly payments are typically more expensive.
Handing the car back
One way of understanding the difference between PCP vs lease vs HP is when you hand the car back. Leasing is simple, you hand the car back when your agreement comes to an end after the term you decided at the beginning (typically 2 or 3 years). With HP you will keep the car once you have paid it off. Finally, with a PCP deal, you get the option to either return the car; pay a final balloon payment to keep the car; or part exchange the car.
Alex and Oliver explain the difference between PCP, lease purchase (HP) and contract hire (leasing) in a quick video. (include the embedded video here)
Pros And Cons Of Leasing Over PCP And HP
So what are the advantages and disadvantages of leasing over PCP and HP agreements? We take a look at the pros and cons to help you figure out if leasing a brand new car or van is the right choice for you.
Pros Of Leasing Over PCP And HP
Never sell your car again
With Hire Purchase and PCP, there will probably come a time where you are going to want/need a new car and will need to go through a bit of hassle with trying to sell your car. With leasing, you don’t own the car so you don’t ever need to sell it, you simply hand it back. Therefore, there is no hassle at the end of the term to worry about. What’s great is that you can get a brand new car every few years and will be able to afford a slightly more expensive car.
Fixed monthly payments
You don’t need to worry about interest rates throughout the lease term as your payments are fixed and won’t change. There are no hidden charges – you simply agree on the monthly payments and that’s it! Even if the government massively increases tax on diesels while you’re in the middle of a contract, it won’t affect you.
Flexibility
Lease contracts are becoming more and more flexible these days. Our leasing partners and their funders understand that circumstances change, and you can often end the lease early without needing to pay the lease in full. It is also pretty straightforward if you’d like to renegotiate your mileage if you’re doing more or less than expected.
Cost
The number one benefit for leasing vs PCP and HP is that the monthly amounts will usually be much less. Our ‘Why Lease’ page explains in detail how you could save £7,730.02 over the course of the lease term over the PCP deal with an Audi A4 Avant deal. Leasing is the most affordable way to drive a brand new car, often a better car than you would expect.
Cons Of Leasing Over PCP And HP
Mileage restrictions
You will select your mileage at the beginning of the lease agreement. If you go over this mileage then there will be an excess mileage charge, or you will need to have renegotiated your mileage before you go over it. Although, excess mileage charges typically range from around 3p to 30p per mile, with the most common charge being around 7p per mile. So, if you do go over your agreed mileage, it isn’t a major issue at all. If you believe you may go over your mileage limit, let us know and our leasing partners will happily be able to assess your mileage requirements and renegotiate a new monthly amount as you need.
Never own the car
When you lease a car you will never ‘own’ it, as it is a long-term hire where the car belongs to the leasing company. So you will never own the vehicle and have nothing to sell by the end of it. Once the lease deal is over, you will need to get a new car.
Wear and tear restrictions
You will need to take care of your lease vehicle and ensure that by the end of the lease, it is to the standard set of the BVRLA guidelines for what is deemed acceptable for fair wear and tear. If you’ve taken care of your car and there is just normal wear and tear then you will not have to pay anything at the end. However, if it goes beyond the BVRLA guidelines and isn’t repaired before being returned then you may face a charge.
Which Car Finance Option Is Right For Me?
There are pros and cons to each car finance option, so it’s best to have a good think about which option is the best one for you. If you are considering all three options, we highlight our top things to consider when deciding.
How do you plan to use the car?
With leasing and PCP, you will need to stick to an annual mileage that you have agreed for the term. If you’re someone who doesn’t want to estimate their annual mileage and uses your car for longer commutes, it may be best to consider HP as you won’t be tied down to mileage. With HP deals you also don’t need to stress about minor damage to the car, whereas with PCP and leases you need to consider the wear & tear guidelines. Although, with leasing, you’re covered by the manufacturer’s warranty if anything goes wrong with the car.
Do you want to own the car?
For many people, this doesn’t matter, but if owning a car or van is extremely important to you then it may be better to opt for a PCP or HP. If you’re not too bothered about owning the car, then leasing is a good choice. It means that you are not left with a depreciating asset that you will eventually want to sell as it ages and requires more and more repairs.
What car do you want?
Leasing will be the best option if you enjoy driving new cars regularly and getting to benefit from the latest models and car specs. Car leases only offer brand new vehicles, so if you’re looking for a second-hand car then you will need to opt for a PCP or HP deal.
If you’ve read this guide and decided that leasing is the right car finance option for you, then head to our search page where you can compare the hottest lease deals on the market and find your perfect deal in just a few clicks.