When you need a car and finance feels like a mind boggle, it’s easy to put off your research.
But when it comes to financing your car, deciding on just one key factor can help you narrow down your choices - whether or not you want to own it.
In this article we take a look at two of the best ways to finance a car: car hire purchase, and leasing. There are a bunch of advantages to both owning and not owning your car, so here we’ll run through the pros and cons to help you find the right fit.
What is Hire Purchase?
Car Hire Purchase is pretty much the gold standard if you want to own a car but can’t afford the upfront payment.
You get to spread out the overall value of the car, paying around 10% initial deposit upfront, then the rest over a contract of around 1-5 years.
At the end of the term, there’s just a small fee of around £100 to pay, and the car is all yours.
Like most car finance options, you’ll have to pay interest over the course of the contract, but with a great credit score, you can nab a pretty low interest rate.
What is leasing?
If you have no idea how car leasing works, we’re here to help you out. Car leasing, (also known as Personal Contract Hire (PCH) or Business Contract Hire (BCH)), means paying a set amount every month to hire a car, then handing it back at the end of the contract. Though it’s similar to traditional car hire, there are some main differences.
With leasing, you’re normally hiring the car for a term of around 2-4 years, over which you’ll pay the cost of the car’s depreciation. As you never own it, the car needs to remain in good condition within the BVRLA guidelines to “fair wear and tear”, and you have to stick to an annual mileage or face excess mileage charges.
You won’t have the chance to buy the car at the end of the contract, but you do get the lowest monthly payments, a brand new lease car every couple of years and none of the hassle of a depreciating asset.
Pros and cons of each
We’ll get to the nitty gritty comparison soon, but if you’re looking for a quick overview, here’s our main pros and cons for both leasing and hire purchase.
HP pros and cons
Eventually own the car
No mileage restrictions
Good for low credit scorers
High monthly payments
You don’t own the car ‘til final payment
Leasing pros and cons
Lowest monthly payments
Brand new car every few years
Regular affordable upgrades
Annual mileage limit
Only available for new cars
You never own the car
Which is right for me?
By this point you’ve hopefully worked out that leasing and hire purchase are pretty different! The right choice for you will really depend on different factors like budget, what you plan to use the car for, and whether you want to own it.
It’s easy to get overwhelmed with the details when buying a new car, so we put together our top things to consider when choosing between a hire purchase agreement and a lease agreement.
Do you want to own the car?
Likely the first thing you want to decide if you’re choosing between Hire Purchase and leasing is whether you want to own the car.
With leasing you never actually own the vehicle, so though the payments are low, you’re only paying to hire it. This works well if you want a new car every couple of years, as you won’t have the hassle of ownership, or the stress of high monthly bills.
If you decide you’re not that keen on your car, just return it at the end of your lease and choose another
Hire purchase gives you the advantage of owning the car at the end of the contract, but a lot less flexibility. The car still remains the property of the dealership or finance company until you submit the final payment, so if you fall behind with payments or stop paying, the car could be whipped away before you know it.
It’s equally risky to change your mind, as most HP agreements require you to pay half of the total amount in order to end the agreement.
How much can you afford monthly?
One of the most important questions to consider when deciding “Should I finance a car?” is the cost. Hire purchase and leasing are opposites in many ways, but one of the most significant is the cost.
HP often has higher monthly instalments than leasing, as you’re contributing to the total cost of owning the car. Though you have the bonus of owning your car at the end of the term, you have to consider the cost of the car plus interest.
Taking out a longer plan will lower your monthly costs, but increase what you pay overall since you’ll have additional interest. You also need to factor in the car running costs and the cost of car maintenance.
However, with HP you have the option to buy a used car, which could help lower costs overall. Leasing only offers deals on new vehicles, but it has more affordable monthly payments, and usually means you can get a slightly higher spec vehicle on a lower budget.
If you’re not that bothered about high-tech, top of the range cars, you could end up paying more in the long run for gadgets you’re not that fussed about.
What do you want to use the car for?
If you’re eager to make any kind of modification to your vehicle, you’ll want to go for Hire Purchase over leasing.
Since you’re working towards owning the car with HP, there’s rarely any mileage or wear restrictions on the car, and you can pretty much do what you like (other than sell it during the contract term).
HP could also be a better fit if you’re planning on running up the miles. Mileage is factored into the cost of leasing, so if you’ve got extravagant plans for road trips, it could work out fairly costly.
However, if you prioritise high tech, leasing is definitely a great option. You’ll be able to upgrade your car in line with modern technical advances and you won’t have to stress over selling a dated model.
Alternatives for both
As the UK’s first car leasing comparison site, we’ve got a fair bit of experience in all things leasing. If you need a hand getting to grips with it, check out our Ultimate Guide to Personal Contract Hire.
Leasing or Hire Purchase aren’t the only options though, and there’s plenty of other ways you can finance your car. For finance, you can also use Personal Contract Purchase or a bank loan. We’ve done guides on what is PCP finance and how to get a car loan.
PCP is a good alternative to leasing if you think you might want to own, as you have the optional balloon payment at the end of the contract to purchase the vehicle. See our PCP vs leasing and PCP vs HP posts for comparisons.
On the other hand, a personal loan would be well suited to anyone considering HP, as you get to own the car right away, and can potentially make repayments over a greater period of up to 7 years. If you’re stuck between hire purchase, leasing or buying a car, take a look at our posts on buying a car with a credit card and paying cash for a car. We have pinned PCP or buying outright and PCP or bank loan together too.
If leasing wins for you in the lease vs finance battle, make sure you check out Lease Fetcher’s handy car lease comparison tool. You can compare all makes and models of cars to find the best deal for you!