Lease Purchase vs Hire Purchase: Which Car Finance Option Is Right For Me?

5 minutes Published: 05/07/2021

If you’re looking to get a new car, it’s likely you’ve come across a tonne of acronyms for all the different ways you can get your hands on a set of wheels.

We know it can all be a bit confusing if you’re looking at finance for the first time. But if you’re in the group of car finance searchers hoping to own the car, the key word you should be looking for is ‘purchase’.

If a finance method mentions ‘purchase’, it’s pretty likely that at some point you’re going to own the car. In this article, we’re going to cover two methods of finance that lead you to eventually owning the car: Lease Purchase and Hire Purchase. We’ll cover how they each work, the main pros and cons, and how you can decide between them.

What is a Lease Purchase?

You may have heard of leasing before, but a Lease Purchase is less common, and works a little differently to a regular Personal Contract Hire agreement (we explore what that is in our “what is PCP finance” post.

You still have the same initial process going through a car lease credit check, and paying an initial rental, but when it gets to the end of the contract, you don’t hand the car back. 

With a lease purchase, you have to buy the car. After all your monthly payments, you’ll pay a final lump sum at the end of your contract that normally works out around 20% of the car value. If you’re deliberating between leasing or buying a car and you know you’d like to own the car, lease purchase is well worth a look in.

What is Hire Purchase?

Car Hire Purchase works in much the same way, as you’re paying towards owning the car. You pay an initial deposit, then have monthly installments over a term of up to 5 years. 

When you reach the end of your contract, you’re required to pay a small ownership fee of around £100, and then the car is legally yours.

Similar to most finance methods, until you’ve paid off this total amount, the car remains the property of the dealership, lender, or finance company. 

Pros and cons

Hire Purchase and Lease Purchase are fairly similar, but they do vary quite significantly in terms of cost, and one may be better suited depending on your budget. 

Before jumping into one or the other, take a look at our top pros and cons.

Lease purchase pros and cons

Pros

  • Low monthly payments

  • Flexible lease terms

  • Affordable a higher spec car

Cons

  • Expensive balloon payment

  • Only available for new cars

  • No option to return the car

Hire Purchase pros and cons

Pros

  • Eventually own the car

  • No mileage restrictions

  • Good for low credit scorers

Cons

  • High monthly payments

  • You don’t own the car ‘til final payment

  • High interest

Which is right for me?

It can be difficult deciding whether you want to own your car at all, so choosing between similar methods of finance can feel extra tricky. 

To help you decipher the ins and outs that might sway you one way or the other, we compiled our top things to consider when looking at Lease Purchase vs Hire Purchase.

What kind of car do you want?

If you’re looking for something a little higher spec, Lease Purchase could give you the opportunity to get that fancy car you’ve been eyeing up for months. 

As your most significant payments are at the beginning and end of the agreement, your monthly instalments typically work out a lot lower than HP payments. This even gives you the opportunity to save up for the final balloon payment. 

But fancy tech isn’t for everyone, and when you’re just looking for a reliable car to get you from A to B, HP may work better. If you’re not fussed on buying a new car, most dealerships will offer HP deals on a variety of used cars.

How much can you afford monthly?

When it comes to Lease Purchase vs Hire Purchase, the main difference is really in what you pay and when you pay it. 

If you can afford the higher monthly payments, Hire Purchase could work out cheaper overall as you’re paying off the cost more quickly, and therefore paying less interest. You won’t have the stress of a huge payment lurking, and can relax knowing that when you reach the end of the term, the car is all yours.

With Lease Purchase you have the advantage of lower monthly installments, which could be ideal if you’re on a tighter monthly budget. However, if you take a Lease Purchase based on this, you need to be prepared for that big final payment. 

If you’ve gotten yourself into a sticky financial situation, some finance companies will allow you to take out additional finance to cover the remaining cost. But generally, it’s better not to enter into a deal you’re not sure you can afford.

Alternatives

If you’re eager to own your car, but neither lease purchase or hire purchase seem right, you could finance your car using a personal car loan (learn more about how to get a car loan here). This allows you to own the car straight away, and you can typically spread the cost out over longer terms than typical car finance deals.

Struggling to decide whether you want to own or not? A PCP deal offers the flexibility of choosing at the end of the contract. Drive your chosen car around for around 3-4 years, then decide whether you want to keep it. If you’d like to own it, hand over the balloon payment, and if not, simply return the car. 

If you’ve decided you want to finance but just can’t choose between them all, our comparison posts on the best ways to finance a car can guide you in the right direction:

If you don’t know if finance is for you, see our “Should I finance a car” post. If you’re swaying towards buying outright, read up on buying a car on a credit card, paying cash for a car, and our PCP or bank loan and PCP or buying outright comparison posts.

Don’t ever want to own the car? Regular car leasing could be for you! You’ll get a brand new car every couple of years with low monthly costs, and no substantial final payment to dread. Make sure to check out Lease Fetcher’s car lease comparison tool to find the best personal car leasing or business car leasing deal for you!