What is the difference between leasing and financing a car?
If you’re considering buying a new car, you might have come across a couple of common terms: lease and finance. Both are agreements that allow you to spread the cost of a vehicle over an agreed period, but what are the differences?
In this article, we’ve outlined what car leasing and financing are, the differences between leasing vs financing a car, and how to choose between the two.
What is car leasing?
In simple terms, leasing a car is essentially another way of saying you’re renting it from a dealership. The car will be registered to you for an agreed period of time, usually between one and five years, and you’ll pay monthly instalments to cover the lease. These instalments will be determined depending on:
- The expected loss in value of the car over the term
- The length of the agreement
- Your agreed annual mileage limit
Because the cost of leasing is largely determined by the car depreciation, choosing a model that retains its value over the agreement term can help to keep monthly payments down.
What is car finance?
There are two common types of car finance, hire purchase and PCP. We’ve offered an introduction to each:
Hire purchase finance
Hire purchase finance - sometimes referred to simply as HP – is Zuto’s most popular type of loan for customers looking to buy a used car. Usually, hire purchase agreement terms are spread over 1-5 years, and you’ll cover the full cost of the car plus interest with regular month payments. This means the vehicle is yours once the final instalment has been settled. The process typically follows:
- Pay a deposit
Preparing a deposit usually makes it easier to demonstrate affordability when taking out finance, and it helps to reduce monthly instalments. However, we also work with a panel of lenders who offer no deposit car finance.
- Make monthly payments
Monthly repayments depend on the cost of the car and duration of your finance term. The cost will also include interest expressed as an annual percentage rate (APR). The APR you receive from a lender often depends on your credit score, but don’t worry; we can also help you apply for bad credit car finance.
- End of contract
At the end of your hire purchase finance agreement, you’ll make the final monthly payment and own the car outright.
PCP car finance
PCP car finance loans differs to HP in that your agreement doesn’t cover the full value of the vehicle, but the cars expected depreciation instead. You’ll still make monthly repayments over a fixed term – usually 2-3 years – but, at the end of the arrangement, you have the choice to either return the car or pay a balloon fee and own it outright.
The PCP process typically follows:
- Pay a deposit
Like HP, you can choose to pay a deposit. However, because monthly repayments can be lower than hire purchase, no deposit options are available too.
- Make monthly payments
Monthly payments depend on the expected depreciation on your vehicle, your agreed annual mileage, and the length of the term. Like HP, you’ll also pay interest expressed as APR.
- End of contract
At the end of your contract, you’ll have a few choices. You can either cover the remaining cost of the car and own it outright, return the car and keys to the dealer, or, if you’re in positive equity, part-exchange your car for an upgraded model.
The difference between lease and finance
Both methods of vehicle purchase can, in many ways, seem similar, so we’ve highlighted the main differences between leasing and financing a car.
Leasing is often reserved for new cars
Because leasing revolves around owning a vehicle for a few years before swapping for an upgraded make and model, it’s often reserved for newer cars. Meanwhile, dealerships will offer hire purchase or PCP on new or used cars.
Finance gives you the option to own the car outright
PCP finance and leasing are very similar: you make monthly payments covering the depreciation of a car for an agreed period of time. However, the difference between lease and finance is that you have the option of paying a balloon fee at the end of a PCP arrangement, to own the car outright.
Leasing vs buying a car: which is better?
So, when it comes to choosing to lease vs finance, which is better? Often, it depends on what your priorities are and what you want to get out of car ‘ownership’. To help you out, we’ve outlined the benefits of each.
Benefits of car leasing
There are a couple of reasons why you might choose to lease a car, including:
- You can get a new car every few years
Leasing allows you to choose a new car every few years without worrying about selling or trading in your current vehicle. This suits drivers who enjoy regularly upgrading their make and model.
- A straightforward process
Leasing is perhaps the easiest way to drive a new car. Not only do you not have to worry about selling your vehicle at the end of the arrangement term, but you’ll also find choosing a new car is often simple and straightforward.
Benefits of car finance
- Flexibility gives you the option to own the car
When you take out a car finance agreement, whether it be hire purchase or PCP, you have the option to own the car at the end of the arrangement. This is ideal for drivers looking for an affordable way to buy a car outright.
- Affordable way to purchase a used car
While leasing is a common way to drive a new car without having to pay its full value, financing is popular for drivers looking to buy a used car.
Refinancing a car with negative equity
Negative equity happens when your car is worth less than the amount you still owe in loan repayments. Often, this is because the vehicle has depreciated more quickly than expected.
However, you can still refinance your car, even if it’s in negative equity, although the new agreement will be based on your outstanding amount rather than the vehicle’s value. Get in touch with our team to discuss your options, and we’ll find you the best solution among our varied panel of lenders.
If you’re considering refinancing your current car loan, check out our car finance calculator to get an idea of how much you may be able to borrow. Or, for even more useful advice, check out our range of helpful car finance aftercare guides.
Mike has worked at Zuto since 2018 and uses his experience within the industry to help customers understand the ins and outs of car finance.