Should I Lease Or Finance My Next Car?

Chloe Murphy 7 minutes Published: 21/07/2021

When it comes down to the basic principles, leasing and financing your car can seem like much the same thing. 

You have set monthly payments over a couple of years in order to drive your flashy new car, and no huge upfront cost. But there are key differences that may influence your decision to lease or finance depending on your budget and plans to use the car.  

In this guide to leasing or financing your car, we’ll go over what they are, how they work, and the top things to consider when choosing between them.

If you’re interested in learning more about one or the other, you can head straight to our posts on “what is financing a car” and “how does car leasing work”. 

What is leasing?

Leasing comes in two forms: Personal Contract Hire, or PCH, and Business Contract Hire, or BCH - you can learn more about the latter in our “how does business car leasing work” post.

There are a couple of differences between personal and business leasing, but they fundamentally operate very similarly.

You choose a car, and in return, pay the leasing company a set monthly fee for a term of typically 2-4 years. At the end of the lease term, simply return the car, and take out a new lease deal if you want. 

Unlike PCP or car hire purchase (HP), you won’t have the option to buy it, but since your monthly instalments aren’t contributing to you owning the car, lease payments often work out the cheapest. You can decide how great a down payment you want to contribute, then your remaining costs will be calculated depending on the estimated future value of your car. 

You will have to stick to an annual mileage limit, with fines for excess mileage, and keep the car in good condition according to the BVRLA guidelines or face lease car return charges. On the plus side, you won’t have to deal with any of the hassle related to ownership. No depreciating asset to worry about selling on, and you’re constantly covered by warranty provided your contracts are 3 years or less.

What is car finance?

With a number of options available, car finance can seem confusing at best. 

But for the most part, financing is really simple! We’ve got a guide explaining how car finance works, but the purpose is the same across most methods - to make getting your car more affordable. 

Rather than submitting one full payment, the full cost of your car is split up into monthly payments over a term that you agree with the lender. You either contribute to the entire cost of the car, or the cost of the depreciation, and have an interest rate on top.

Regardless of the make, model or trim you’re looking at, cars can be costly to buy and run, so finance helps create a payment schedule that you can afford. You’ll need to have a decent credit score, but you can check on sites like Experian, Equifax, Credit Karma, and ClearScore before applying to any finance companies. 

Other than leasing, there’s three main options to choose from:

  • Personal Contract Purchase (PCP) - PCP works by paying a deposit and monthly instalments during the contract term, then handing the car back. If you want to keep it, you have a balloon payment to purchase, or you can trade-in for your next car on a new PCP deal. Read more in our “what is PCP finance” post.
  • Hire Purchase (HP) - With HP you pay a deposit, then monthly payments that contribute towards the total cost of the car. At the end of your contract, the car’s yours. Read more in our car hire purchase guide.
  • Personal loan - Works just like any other loan, you borrow money from your bank and buy the car outright. Then make your repayments to your bank over the agreed term. Learn more about “how to get a car loan”.

Though they’re all great options if you don’t want to buy outright, they do operate differently and the best one for you will depend on your specific requirements. 

Pros and cons of each

Leasing and finance work in much the same way, but there are some key differences that will influence which you should opt for.

We’ve rounded up our top pros and cons for leasing and for finance. 

Leasing pros and cons

Pros

  • Lowest monthly payments

  • Brand new car covered by warranty

  • Regular affordable upgrades

Cons

  • Annual mileage limit

  • Only easily available for new cars

  • You never own the car

Finance pros and cons

Pros

  • No deposit (depending on finance type)

  • Available for new or used cars

  • Option to own the car at the end

Cons

  • Mileage limit

  • Damage and excess wear fees

  • Higher monthly payments

Which is right for me?

The first thing to consider when choosing between finance and leasing, is the kind of car you want. If you like to be driving a new vehicle with the latest tech, leasing is likely your best option. You’ll get: 

  • A new leased car every 3 or 4 years.
  • Lower monthly payments than HP or PCP. 

Unless you’re happy to splurge, Hire Purchase and personal loans should probably be crossed off the list. It takes some budgeting to work out how much you should spend on a car, and doing it every couple of years could work out pretty costly. 

How long will you have the car?

For those looking to own a reliable car for the years to come, finance will almost always work out cheaper than leasing. If you plan to keep your car for as long as it runs, HP or personal loan will be your top choices. 

HP has slightly higher payments than PCP, but at the end of the term, you’ll have paid off the entire cost of the car. Financing with a personal car loan means you get to own it right away, but since HP rarely has any restrictions like mileage, it’s best to choose whichever has the lowest rates. 

If you can’t decide whether to lease, finance or buy, it’s worth noting that leasing deals don’t offer the option to buy the car at the end of the agreement. If you think you might be disappointed when you have to say your goodbyes, PCP offers a suitable middle ground. It works much the same as leasing, but you have the choice of a balloon payment at the end of the contract to purchase the car. 

Lease purchase is another option - this works much the same as ordinary leasing, but you have to buy the car at the end.

How much are you willing to pay?

One of the most important things to consider when looking at the best way to finance a car is your budget. 

One of the benefits of leasing is that it typically works out to have the lowest monthly payments (as you’re only paying the cost of the depreciation), but these aren’t working towards owning the car. It’s worth considering whether you’re happy to continually pay monthly for the foreseeable future.

On the other hand, finance can be equally budget friendly as unlike leasing, dealerships will often offer finance on a used car. You’re automatically paying less than the brand new models, plus you have the advantage of spreading the payments out into monthly costs over a couple of years. 

In terms of how you plan to use the car, both car leases and finance options like PCP will limit the number of miles you can do, whereas personal loans and HP don’t. You can usually get a fairly high allowance, but it’s something to keep in mind as you generally pay more the higher it is.

Conclusion

It’s all a lot to consider and pack into one post, so we’ve got some direct comparison guides to help you decide. We’ve covered loads of bases including:

If you think financing isn’t for you, you may want to buy your car outright (or see our “Should I finance a car” post to just gather more information. 

But just because it’s simpler to buy outright, doesn’t mean you should rush in. You need to consider all the additional costs you’ll be responsible for as the owner, like car insurance, road tax, maintenance, and car running costs.

Buying outright also gives you the freedom of buying any car from anywhere, but you should understand your rights when buying a used car before signing or paying. Our guides to paying cash for a car or buying a car on a credit card will give you some food for thought!

As experts in leasing, we are obviously big proponents of it - if it’s the right option for you. If you think leasing is for you, Lease Fetcher lets you compare car lease deals in one place easily. See our personal car leasing and business car leasing deals from UK leading brokers!