Lease or Finance?
There are several different options to consider when choosing the best finance option for your new car. Without being given the right information, it can be confusing to know where to start. Our reference guide will soon equip you with the necessary information to make an informed decision on how you buy your new vehicle.
Just bear in mind that however you choose to finance your next car, it is vital never to borrow more than you can afford to pay back. Remember not to focus solely on the monthly repayment figure, but also the deposit, the interest rate (expressed as the Annual Percentage Rate, or “APR”), and the total amount payable by the end of the loan. As such, it’s best to get any quotes in writing so that you can easily compare deals.
With that in mind, here are the main types of car finance you’re likely to come across:
PCP (Personal Contract Purchase)
With a PCP deal, you pay an initial deposit followed by a set term of monthly payments (usually 36 but sometimes 48) at a fixed rate of interest. Essentially, you’re paying off the depreciation the car is expected to suffer during the term of the finance agreement, rather than its full value, which means monthly costs will be lower.
Central to any PCP deal is the car’s Guaranteed Future Value (GFV), which is basically what the lender guarantees the car will be worth at the end of the loan period based on the mileage set for the duration. When this time comes, you have the option to either return the car, pay to take full ownership, or swap it for a new one.
If you just want to return the car and it’s within pre-agreed mileage limits and not showing signs of damage, then there’s nothing else to pay.
If you want to buy the car, you’ll need to pay the lease company the GFV that was set at the start of the loan, which will be referred to as a “balloon” payment. Do so and the car will be yours.
Where a PCP gets interesting is if you want to swap your current car for a new one. In this situation, a lender will often value it slightly above the GFV in order to give you some equity to put towards another deposit. For example, if the GFV was set at £12,000 but the car is actually worth £13,000 at the end of the finance deal, then you’ll have £1,000 worth of equity to put towards your next PCP deposit. If a lender is particularly keen to get you into a new car, it could even offer to value your car and arrange the swap early, which makes PCPs tempting for those who like to drive the latest models, but who aren’t fussed about ever owning them.
Be aware, however, that it is also possible for the car to fall into negative equity (that is, to be worth less than its GFV). While this won’t cost you if you’re simply handing the car back, it does matter if you want to move into another PCP deal, because it’ll mean paying the full deposit all over again.
Hire Purchase (HP)
With a Hire Purchase plan you are essentially buying the car via monthly payments, made to a finance company. You won’t actually own the vehicle until the end of the agreed finance term and when any transfer fees have been paid.
As with a PCP, there’s a deposit to pay (typically 10% of the car’s value), and you can’t sell the car without the lender’s permission as they technically own the vehicle until the finance is settled. Servicing costs are often included as part of a Hire Purchase deal, but it’s always worth checking this first.
Compared with a PCP, a Hire Purchase scheme will cost more on a monthly basis because you’re paying off the full value of the car, rather than its depreciation. However, this means that it will generally work out as the cheaper option for those who are keen to buy a car outright, plus a Hire Purchase has no mileage limits to adhere to.
Personal Contract Hire (PCH) / Business Contract Hire (BCH)
This is a basically a personal lease deal for those who have no ambition of ever owning the car, but instead only want to lease it over a period of typically two or three years. You’ll pay an initial deposit (often equivalent to three months monthly charges) followed by a regular monthly charge, and are restricted by an annual mileage limit. At the end of the term there is no option to buy the car; you simply hand it back to the lender. The difference between a PCH and BCH is that the BCH contract is underwritten in the name of a registered business where the VAT is shown as an additional payment to the set monthly figure. (i.e £395 + vat). The business or business owner then has the right to claim back the VAT ona quarterly basis.
Contract hire deals can often look attractive because they are like PCP in the sense that you are effectively paying off only the depreciation of the car over the time of your lease, rather than its full value. For this reason, if you choose a car that holds its value well over its first three years, it will tend to come with lower PCP payments than one that plunges in value the moment it’s driven out of the showroom.
Keep in mind that it’s your responsibility to pay to maintain the car, so it’s often worth looking at manufacturer fixed-plan servicing deals, which can offer good value for their cost.
Just like you might take out a bank loan to pay for home improvements, so you can borrow money to buy a car. Interest rates can be competitive, and if you do online banking with the same lender, it can be an easy way to track how much you owe. Plus, there’s no deposit to pay, and because the dealership effectively sees you as a cash buyer, you may be more likely to be able to haggle a discount on the list price than you would be with a car bought with finance.
As ever with loans, the aim is to keep the repayment term as short as you can realistically afford in order to minimise how much you’ll end up paying back. You’ll also need to be aware that the advertised APR might not apply if you have a poor credit rating, and that if you can’t meet repayments, any of your assets could potentially be reclaimed, not just the car.
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