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Car Leasing VS. Hire Purchase

Car Leasing and Hire Purchase are two funding options that allow consumers or businesses to lease or own a vehicle. The two products are very different though, so we have provided some detailed insight to explain the basics of leasing and hire purchase and we have compared the differences between the two products.

If you choose to lease a car your monthly payments will be lower as you are paying the difference between the purchase price of the vehicle and the estimated residual value of the vehicle at the end of the agreement. When leasing a vehicle you will have to keep within an agreed mileage limit as the amount of miles driven will change the likely residual value.

Example: The purchase price of the car is £20,000. 3 years later that car may only be worth £12,000 (this is the residual value). If you lease a car you will need to pay for the difference between these two values, in this case £8,000. You will pay the difference to the leasing company - £8,000 / 36 (months) = £222.22 (per month)

With hire purchase the whole price of the vehicle is financed over the agreed term. Once the payment is made for the vehicle you will take ownership of the car. There is no fixed mileage allowance as you own the vehicle. However, as you are paying the whole price of the car over the loan period, the monthly payments will be higher than if you were leasing the vehicle. With hire purchase the residual value makes no difference to the monthly payments.

Example: The purchase price of the car is £12,000. The hire purchase agreement is over 3 years (36 months). Therefore you will pay £12,000 over 36 months - £12,000 / 36 (months) = £333.33 (per month)

  • The value of the leasing vehicle is higher. This generally means you could have a newer (or brand new vehicle), or a vehicle that is more prestigious.
  • The monthly payments with leasing are lower even though the value of the vehicle is higher.
  • Buying a car on hire purchase means you are not restricted to a set number of miles that you can drive each year.
  • If you choose to lease your vehicle you will not own the vehicle at the end of the agreement like you will with a hire purchase agreement. To take ownership of the vehicle you would have to make a balloon payment at the end of the agreement.

Please note the examples on this page have been simplified and do not include any charges or interest.

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