Shopping for a competitive car finance deal can be a surprisingly confusing experience. Not least due to the sheer range of options available in terms of vehicle finance types.
In the UK, most new cars are bought by way of specialist car finance. The three most popular vehicle finance types are hire purchase, PCP agreements and leasing.
But which of the three is the best option for purchasing a new or used car? If all three options are within your budget, which best suits your requirements?
What is Hire Purchase?
With a hire purchase agreement, you gradually pay your way to car ownership over the course of several years. An initial deposit of around 10% is payable to gain access to the car, after which fixed monthly repayments are made to gradually pay off the balance.
HP agreements are a popular option for spreading the costs of buying a car rather than paying for a vehicle outright. When the final monthly instalment has been made, legal ownership of the car is transferred to the customer.
What is PCP?
PCP effectively blurs the line between hire purchase and leasing. Similarly to an HP agreement, you pay an initial deposit followed by a series of monthly repayments. The difference being that with PCP, you do not automatically become the owner of the vehicle when the balance has been repaid.
At the end of the agreed term, the customer has the option of making a final ‘balloon payment’ to take ownership of the car. Alternatively, they can upgrade to a newer car and continue their monthly repayments or hand the car back to the provider and terminate the contract.
What is Leasing?
Leasing is essentially a form of long-term vehicle rental; a deposit is required to take possession of the car, followed by the agreed monthly repayments for the length of the term. There is no option to take ownership of the vehicle, which is handed back to the provider when the term comes to an end.
This is a popular option for motorists not interested in owning their own car but who may prefer the flexibility of leasing over purchasing a vehicle outright.
What Are the Pros and Cons?
HP and PCP agreements tend to be far more popular among UK customers than leasing; however, there are pros and cons to be aware of with these kinds of contracts, including the following:
Pros of HP Car Finance or PCP:
- You can take full ownership of the car after paying off the balance
- Mileage restrictions do not normally apply with hire purchase
- Monthly repayments on a PCP contract can be highly affordable
- The costs of buying a car can be spread over several years
Cons of HP Car Finance:
- The monthly repayments may be much higher than leasing
- You cannot modify or sell the car until you have fully paid for it
- The provider remains the legal owner of the car during the agreement
- Depreciation could significantly reduce the car’s resale value
If you are content with the idea of not actually owning the car you drive, leasing is an option worth considering. A few of the benefits and drawbacks of leasing are as follows:
Pros of leasing:
- Your monthly repayments will almost always be much lower
- The option of upgrading to a newer or better car regularly
- You can drive a car you would not normally be able to afford
- Repair and maintenance costs are covered by the provider
Cons of leasing:
- Annual mileage limitations will usually apply
- There is no option to take ownership of the car
- It is usually not possible to lease used cars
Which Option is Right for Me?
Ultimately, deciding between the two main options means establishing whether or not you want to own your car.
Purchasing a vehicle by way of HP or PCP agreement means that at the end of the term, you have an asset of value under your ownership. This gives you the flexibility to drive without making any further monthly payments or sell on when upgrading to something newer.
When you lease a car, you come out of the deal with no such asset.
But whether or not this matters, is purely a case of personal preferences and perspectives. Leasing opens the door to being able to drive a car you would not be able to afford to buy. It also gives you the opportunity to upgrade to newer and better cars every few years.
All with the added bonus of not having to pay for repairs, maintenance and servicing out of your own pocket.
If in doubt, consult with your preferred car finance company to ensure you fully understand the options available. During which, an extensive market comparison will be performed on your behalf to help you get the best possible deal.
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