PCP vs Lease: Which Is Best For You?
In the market for a new car and stumbled across this post? PCP and leasing are two of the most popular methods of car finance in the UK, and understandably, it’s tricky to pick between the two!
In this guide, we’ll walk you through how PCP and leasing work, the pros and cons of each, the similarities and differences between the two, and how to decide which one is best for you.
What is PCP and how does it work?
Personal Contract Purchase (PCP) is a flexible form of car finance that allows you to choose whether or not you want to own the car at the end of your contract.
The cost of a PCP finance agreement is based on the estimated value of the car at the end of the contract (the Guaranteed Minimum Future Value, or GMFV). This in turn is based on the model of car, contract length, and mileage allowance. Over your contract, you pay the difference between the GMFV and the initial cost of the car.
If you choose to keep the car at the end of your contract, you’ll pay a large balloon payment that is equal to the GMFV and the car is yours.
We’ve done a whole guide on how PCP finance works if you’d like to know more.
Here’s a rough outline of the process of using PCP finance:
- Set up your contract - choose the model of car, contract length, and mileage allowance.
- Pass credit checks and provide necessary documentation.
- Get the car!
- End of deal options:
- Return the car (pay any damage/mileage excess penalties if necessary).
- Pay balloon payment to keep the car.
- Trade in car for part exchange - if the value is higher (positive equity) than the balloon payment, use this towards a deposit on a new car.
What are the pros and cons of PCP?
Pros
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Fixed monthly payments.
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Flexible deals.
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Option to buy the car outright.
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Easy to hand the car back at the contract end.
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3-5 year average contracts so easy to keep up with changing technology.
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Can get used cars on PCP for cheaper monthly payments.
Cons
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Fees for exceeding mileage allowance.
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Fees for causing damage beyond wear and tear.
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Don't own the car until you pay the balloon payment.
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Higher interest than other car finance methods.
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Road tax only included for the first 12 months.
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Early termination charges if your circumstances change.
What is leasing and how does it work?
Car leasing is also known as Contract Hire - Personal Contract Hire (PCH) for personal customers and Business Contract Hire (BCH) for business customers. It’s like a long-term rental agreement where you pay off the cost of depreciation during your contract, but the goal is never to own it.
The cost of leasing a car is the cost of depreciation (usually around 40% over 3 years) divided between an initial rental and your monthly payments. You can adjust the ratio of payment between your initial rental and monthly payments.
We’ve done a whole guide on how car leasing works if you’d like to learn more.
Here’s a rough outline of the process of a car lease:
- Set up your contract - choose the model of car, contract length, and mileage allowance.
- Pass credit checks and provide necessary documentation.
- Get the car!
- Return the car (pay any damage/mileage excess penalties).
What are the pros and cons of leasing?
Pros
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Brand new, factory-fresh cars.
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Flexible deals.
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Fixed monthly payments.
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Road tax included for the full contract.
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No reselling worries - simply hand the car back.
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2-4 year average contracts so easy to keep up with changing car technology.
Cons
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You don't own the car.
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Fees for exceeding mileage allowance.
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Fees for causing damage beyond wear and tear.
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Early termination charges if your circumstances change.
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Not good for poor credit scores.
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Not often used for used cars.
Similarities and differences between PCP and leasing
| Feature | PCP | Leasing |
|---|---|---|
| Fixed monthly payments | ✅ | ✅ |
| Flexible contract terms | ✅ | ✅ |
| Available for poor credit scores | ✅ | ❌ |
| Available for used cars | ✅ | ❌ |
| Insurance included | ❌ | ❌ |
| Road tax included | ✅ - only for first 12 months | ✅ |
| Maintenance and repairs included | ❌ | ❌ |
| Charges for damage beyond wear and tear | ✅ | ✅ |
| Charges for exceeding mileage allowance | ✅ | ✅ |
| Option to buy car outright | ✅ | ❌ |
| Early termination charges | ✅ | ✅ |
| Can use part exchange to pay towards your deal | ✅ | ✅ |
| Interest paid on the entire vehicle value. | ✅ | ❌ |
Which is better for me?
All of this has been very useful, but how does it apply to you and your specific driving needs? Here are the things to consider when deciding whether PCP or leasing is the best option for you.
Budget
Both PCP and leasing offer fixed monthly payments. Leasing is usually cheaper because you are not being charged interest on the whole value of the car (you are with PCP). With PCP, you’re paying a premium for the option of potentially buying the car outright at the end of your contract. Leasing costs are lower because you never will own the car.
Ownership
Is it important to you to own the car? With leasing, you’ll never own the car - you simply hand it back when your contract ends. With PCP, you have the option to buy or hand the car back.
Changing car technology
Are you someone who likes to keep up with the latest car technology? With both leasing and PCP, it’s easy to hand the car back after your contract ends, and get another brand new car. If you want to keep on top of the latest car trends, you’re better with leasing - there’s no point paying a premium to give yourself an option to buy which you’ll never take!
Conclusion
Choosing between PCP and leasing depends on your circumstances, which we’ve outlined above. The two forms of car finance share many similarities but have some core differences that will make or break the decision for you.
