Saving for a vehicle isn’t easy. As a result, large numbers of motorists are now opting for alternative solutions such as car finance or car leasing.

Both these options can be greatly cost-effective, enabling you to get behind the wheel of the car you want, without the expensive upfront cost of buying the vehicle outright. However, deciding which option is best can be tricky.

In this guide, we make things easier by comparing the advantages and disadvantages of car finance vs car leasing, as well as the key factors to consider before entering a finance or leasing agreement.

What is car finance?

Car finance is a secured loan that enables you to spread the cost of purchasing a vehicle into affordable monthly payments. When you apply for car finance, you will usually have a choice of two options; Hire Purchase (HP) or Personal Contract Purchase (PCP).

How it works

The majority of car finance terms are between two and four years. Most lenders require an initial deposit, typically 10% of the vehicle’s value. However, depending on your circumstances you may be eligible for no-deposit car finance.

If you opt for HP, the entire value of the vehicle is divided evenly across affordable monthly repayments, and at the end of the agreement, you own the vehicle.

However, with PCP your monthly payments are calculated based on the difference between the value of your vehicle at the start of the agreement, and its predicted value at the end of the agreement. In car finance terms, this is referred to as the guaranteed future value (GFV).

In other words, PCP payments cover the cost of depreciation across the length of your contract, plus interest. Of course, mileage has a big impact on the value of a vehicle, so to determine the cost of depreciation over the length of the agreement, you’ll need to agree on an annual mileage limit with the finance provider at the start of your contract.

Once you reach the end of your PCP agreement, you have 3 options. Either return the vehicle to the lender with nothing further owing, keep the vehicle and pay a balloon payment, or return the vehicle and use any positive equity to exchange it for a newer model.

Getting approved for car finance

Just like all other types of loans, lenders will need to examine your credit profile to check your eligibility before you can be approved for car finance. However, the good news is you don’t need a perfect credit score to be eligible for car finance. For example, at Creditplus, we provide finance solutions for individuals across all credit backgrounds, including people with bad credit.

Car finance pros

✔ Reduced initial outlay

Unlike buying a car outright, you don’t need to spend months or years saving for a vehicle. And while most finance agreements may still require a deposit, this is usually only 10% of the vehicle’s value.

✔ No mileage restrictions (HP only)

When you lease a car you have an agreed annual mileage limit. However, with hire purchase, you have maximum freedom as there are no mileage restrictions.

✔ More flexibility (PCP only)

With a choice of options at the end of the agreement, PCP offers great flexibility. But with car leasing, you do not have the option to keep or exchange the vehicle. Instead, you must return it to the lender. 

✔ Widely available (HP only)

Hire purchase is available to individuals across all credit backgrounds, including those with bad credit. However, car leasing is typically only available to those with a good or excellent credit rating.

Car finance cons

✘ Maintenance costs aren’t included

Unlike the majority of car leasing agreements, maintenance costs aren’t included in your monthly repayments. This means if something goes wrong with the vehicle during your contract, it’s your responsibility to fix it - not the finance provider.

✘ Higher monthly repayments (HP only)

With hire purchase, you are paying off the entire cost of the vehicle. Therefore, your monthly payments are usually higher compared to a lease agreement.

What is car leasing?

Car leasing is similar to a long-term car rental. You pay a fixed monthly payment each month for an agreed term and at the end of the contract, you return the vehicle to the leasing company. 

A common misconception is that leasing is only available for brand-new cars, however, car leases are becoming increasingly popular for second-hand cars too.

How car leasing works

Like car finance, most leases typically run between two and four years. At the start of your contract, you’ll need to agree on the term-length and annual mileage with the leasing company, as the cost of depreciation is factored into your monthly payments. Most leasing companies also require an initial upfront payment, usually equivalent to three or six monthly payments 

Generally speaking, more mileage will result in faster depreciation. Therefore the higher your annual mileage, the greater your monthly cost. However, it’s important to be realistic about the number of miles you drive each year, as exceeding your agreed limit will result in charges. And whilst this is usually only a few pence per mile, it can add up surprisingly quickly.

At the end of the agreement, you must hand the vehicle back to the leasing company. Any damages to the car can impact the resale value of the vehicle, so it’s important to ensure the vehicle is returned in good condition. Of course, the leasing company will allow for general wear and tear, but if there are any damages that fall outside their fair wear and tear standards you will likely be charged for the repairs.

Getting approved for car leasing

Getting approved for car leasing can be harder compared to car finance, simply because leasing companies are taking a greater risk. For example, with hire purchase, the individual is paying off the entire value of the vehicle. If they fail to honor the agreement, the finance provider can claim the car back.

With car leasing, the vehicle still belongs to the leasing company and they are entitled to claim it back if required. However, unlike a hire purchase agreement, the individual is not paying off the entire value of the vehicle. So if they are unable to continue their payments, the leasing company is stuck with a broken lease and a car worth less than it was at the start.

Car leasing pros

✔ Maintenance costs are often included

When you lease a car, maintenance costs are often covered by the manufacturer’s warranty. Most of the time, this means annual servicing and replacement for wear and tear items are taken care of.

✔ Drive a newer car for less

With great deals available on brand-new cars, car leasing has become the most affordable way to get behind the wheel of a brand-new car.

✔ Avoid the hassle of selling

Selling a car can be time-consuming. But by returning the car to the leasing company at the end of the agreement, you never have to worry about selling it on.

✔ Change your car regularly

For motorists that like to change cars regularly, car leasing is the ideal option. After your final payment, you can simply return it to the lender and take out a new lease on a newer model.

Car leasing cons

✘ A strong credit profile is required

Unlike hire purchase, which is available to individuals across all credit backgrounds, car leasing is typically only available to those with a strong credit rating.

✘ Restricted by mileage limits

If you’re a high-mileage driver, you may find the restrictions limiting. If this is the case, you may be better suited to a hire purchase agreement.

Frequently asked questions

Where is the best place to finance a car?

To get the best car finance deal, you should use a trusted FCA-regulated finance provider. As one of the UK’s leading car finance brokers, Creditplus provides car finance solutions to thousands of customers every year. And by comparing over 90 lending options from our panel of top high-street lenders, we ensure you’re getting the very best deal for your circumstances. To discuss your finance options with one of our friendly car finance experts, simply complete our quick and easy no-obligation application form.

What’s a good interest rate for a car loan?

Interest rates are calculated by lenders based on an individual’s specific circumstances. As a result, interest rates can vary significantly from person to person.

The most important factor used to determine your interest rate is your credit score, as this indicates how likely you are to repay the loan. If you have a poor credit history, perhaps from missing payments in the past, the lender will see you as a greater risk to lend to and will attempt to mitigate the risk by increasing your interest rate.

Because interest rates are different for everyone, it’s hard to advise on what to expect. However, a good way to compare your lending options is by observing the representative APR advertised by the lender.

A representative APR means at least 51% of customers were offered that rate or lower. This helps to provide a more realistic idea of the rate you might be offered, as opposed to comparing the very best rates, which are usually only reserved for individuals with immaculate credit profiles.

Are car finance deals worth it?

Car finance has helped millions of motorists buy cars that would otherwise be unaffordable. But to get the most from a car finance deal, it’s important to consider your options carefully and choose the right package for your individual needs. For example, if you want the freedom to drive longer distances without worrying about mileage restrictions, a PCP or car leasing agreement may not be a suitable option, but you may be more suited to a hire purchase loan. Whilst it means your monthly payments may be slightly higher, you can drive without restrictions and at the end of the agreement, the car is yours.

Is insurance higher when you lease a car?

When you insure a leased vehicle, most leasing companies require you to have a full comprehensive cover. In the event of an accident, this covers damages to your own car in addition to other drivers, unlike third-party insurance which only covers other drivers.

People often assume that leased cars will therefore cost more to insure. However, fully comprehensive insurance is usually no more expensive than third-party, so this isn’t always the case. That being said, leased cars are typically newer, higher-spec vehicles, therefore their insurance premiums are likely to be higher.

If you want to keep your insurance costs down, check the insurance category of the vehicle first. All cars are categorised into insurance groups 1 to 50. The higher the category, the more expensive the insurance premium will be.

What is the cheapest way to buy a car?

If you have the cash to spare, then purchasing a vehicle outright is the most cost-effective option in the long-term, as you don’t pay any interest. However, if you don’t have the funds available then car leasing typically offers the lowest monthly cost. But remember, unlike a HP or PCP agreement, you have to return the car at the end of the leasing agreement.

What credit score is needed for a lease?

Each credit reference agency has its own scoring model, which means your credit score will change between each provider. For example, an excellent credit score with Equifax is anything between 466-700, whilst Experian is 966-999. As a result, there is unfortunately no magic number that will guarantee your eligibility for a lease. However, as a general rule, most car leasing companies require a good or excellent credit rating.

Ready to apply?

With the help of our comparison guide, you hopefully now have a better understanding of car leasing and car finance. But if you’re still unsure which option is best for you, don’t worry. Our team of friendly customer consultants will be more than happy to discuss your options with you in more detail and answer any further questions. Just complete our quick and easy, no-obligation application form and a member of the team will be in touch.

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