Should I lease or finance a car?

It’s important to remember that the right choice for you will depend on your individual circumstances. Your budget, credit history, driving habits, and preferences are all factors to consider when comparing car leasing and car finance.

6 min read
man signing car agreement and lady shaking hands with car salesman

When it comes to buying a car, you have several important decisions to make. You need to choose between a new or used vehicle, decide which make or model would best suit your needs, and work out whether you should pay in cash or use car finance. However, there is another option: car leasing.

Both options may be suitable even if you have a poor credit score, though you may find that borrowing is limited, and higher rates of interest apply.

The difference between leasing and car finance

What is car leasing?

Car leasing in the UK is a form of long-term car rental. If you’ve ever rented a car on holiday or while your vehicle is in the garage for repairs, then you’re probably already familiar with the terms and conditions that can apply.

How does car leasing work?

Car leases – also known as personal contract hire (PCH) – typically last between two and four years. You’ll pay fixed monthly payments throughout the hire term and then give the car back when your lease ends. These payments are usually lower than car finance repayments, but you might need to pay a deposit upfront and agree to a set annual mileage limit. If you exceed the agreed number of miles or damage the car beyond everyday wear and tear, you could face extra charges when you hand the car back.

What are the pros and cons of leasing?

Advantages of leasing a car

  • You can change car regularly
  • You could access newer or more expensive cars with the latest technology and equipment
  • You may have lower monthly repayments than some car finance options
  • You don’t have to worry about depreciation or resale prices
  • Maintenance packages are available

Disadvantages of leasing a car

  • You’ll need to commit to an annual mileage limit
  • Any damage beyond standard wear and tear can result in extra charges
  • You’ll never own the car
  • You can’t make any modifications to the car
  • You’ll be tied in for the full term of the lease and may have to pay a penalty to end it early

What is car finance?

Car finance can help you split the cost of a new or used car into manageable monthly repayments. Depending on the type of car loan you choose, you could work towards owning the vehicle outright, hand it back at the end of your agreement, or use any positive equity as a deposit for a new finance deal.

How to get car finance

There are several options on offer when looking for car finance. You might be able to secure a loan directly from the dealership, from your bank, or from an online car finance broker. No matter which option you choose, lenders will take a range of factors into account before approving your application, including your credit score, employment status, and the amount of disposable income you have each month.

Hire Purchase

Hire purchase (or HP) is one of the most popular types of car finance agreements available in the UK. It is secured against your vehicle, so you won’t own your car until you’ve made your last payment and covered the final ‘Option to Purchase’ fee. As you’re working towards car ownership, you’ll likely face higher monthly repayments than you might have with other types of car finance, but you also won’t have to deal with restrictions on the number of miles you drive each year. HP car finance agreements typically last between one and five years.

Personal Contract Purchase

Like HP, with personal contract purchase (PCP) you will typically pay a deposit towards the car before making regular monthly payments (though some lenders offer no-deposit options). Unlike HP, you will need to agree to a mileage limit and avoid causing damage to the vehicle, otherwise, you could face extra charges. When your PCP agreement comes to an end, you can do one of the following:

  • Buy the car via a one-off balloon payment, which is calculated at the start of the agreement and is based on how much the lender believes the car will be worth by the end of it
  • Hand the keys back to the lender
  • Use any positive equity in the car (i.e., if its resale value is worth more than the balloon payment) towards a deposit on a new car finance agreement

What are the pros and cons of car finance?

Advantages of car finance

  • You can get finance on used cars as well as new
  • You own the car at the end of your loan term with HP, and you have the option to buy with PCP
  • You can choose a finance solution that suits your budget
  • You can split the cost of a new car rather than needing to build up savings first
  • Making regular payments on time each month could boost your credit score

Disadvantages of car finance

  • You will have to consider depreciation if you become the car’s owner and you want to sell it in the future
  • You may not be able to afford the latest models and tech features
  • You will likely need to pay interest on the loan, so the car will cost more overall than if you bought it outright
  • The car might be repossessed if you can’t keep up with the repayments
  • With PCP, you won’t own the car unless you pay the final balloon payment, which can be thousands of pounds

Is it cheaper to lease or buy a car?

Your budget is likely going to be one of your biggest considerations when choosing to buy or lease a car. Whether car leasing could be the cheaper option for you depends on your financial circumstances and priorities. Car finance monthly repayments can be higher than car leasing. But with car leasing, you could face additional charges if you don’t adhere to the terms of your agreement.

Of course, leasing a car means you never have to worry about it losing value over time, but you also won’t build any equity in the car or be free of repayments while using it – the vehicle won’t ever be yours to own.

Should I buy or lease a car for business?

Business owners often choose car leasing, as it cuts down on upfront costs, allows them to change their fleet regularly, and ensures that they don’t end up stuck with a depreciating asset that they need to sell in the future. It’s also possible to buy leases with built-in maintenance packages to provide added peace of mind. Owning rather than leasing vehicles means dealing with the fact that they will lose value over time, which can hit a small business hard.

Even so, it’s worth bearing in mind that buying cars can, in some circumstances, qualify for capital tax allowances, meaning that businesses that cover large areas or transport-heavy goods don’t need to worry about mileage limits and wear-and-tear guidelines.

Leasing vs buying a car: which should you choose?

Making the choice between car leasing and car finance depends on what’s right for you. There are pros and cons to both, so your final decision should be based on your individual circumstances, wants and needs.

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*Representative example: Borrowing £6,500 over 5 years with a representative APR of 19.9%, an annual interest rate of 19.9% (Fixed) and a deposit of £0.00, the amount payable would be £166.07 per month, with a total cost of credit of £3,464.37 and a total amount payable of £9,964.37. Rates may differ as they are dependent on individual circumstances. Subject to status. We're a credit broker, not a lender.

Disclaimer: All information and links are correct at the time of publishing.

Adele Kitchen, Personal Finance Writer

Adele Kitchen

Personal Finance Writer

Adele is a personal finance writer with more than 10 years in the finance industry behind her. She writes clear and engaging guides on all things loans for Ocean, as well as contributing blogs to help people understand their options when it comes to money.