Car Leasing vs PCP: Which is Best?

When it comes to getting your next car, there are many ways to obtain it, and for our customers, it is often between Personal Contract Purchase (PCP) and Car Leasing (also known as Personal Contract Hire or PCH for short).

They both involve making monthly payments to use a vehicle over an agreed duration, with a few important differences.

Let’s get into it.

What is car leasing?

Car leasing is essentially a long-term rental where you pay a fixed monthly cost to use a vehicle for a set period, typically between 2 to 4 years. At the end of the lease, you simply hand the car back.

It is getting extremely popular in the UK as it allows drivers to upgrade their car every few years and reduces risk, as all lease cars come with a warranty. A car lease also comes with road tax for the duration, whereas you only get the first years included on a PCP.

Car leasing key points

• Usually lower monthly payments than PCP

• Road tax is included for the duration

• Early terminations apply to hand the car back early

• No option to purchase the car at the end (although you can request it)

What is PCP?

PCP is a type of car finance that gives you the option to buy the car at the end of the term. You pay a deposit, followed by monthly payments for an agreed duration, and at the end of the contract, you can either return the car or pay a balloon payment to own it.

PCP is also very popular as it allows drivers to get behind the wheel of their new car without having to put down massive amounts of money. It also gives drivers the option to purchase their car should they want to at the end, whereas there is no option with a car lease.

PCP key points

• Option to purchase the car at the end by paying the balloon payment

• Likely to be easier to end a PCP early compared to a car lease

• You only get road tax included for the first year of your PCP

• Usually higher monthly payments compared to a car lease

Comparing Costs

The first thing to do is compare the overall cost of a car lease and a PCP. If you aren’t bothered about owning the vehicle (around 85% of people hand their PCP cars back in the end), then it should only come down to overall cost.

Take your upfront cost, all your monthly payments, road tax cost on the PCP, plus any other fees, such as broker or lender fees. Once you’ve done that, you’ll know which one is cheaper and it is up to you to decide which one to go for.

If a PCP is going to cost you more but you’re pretty sure you’ll buy it, it might be worth paying the extra to have that luxury. If not, then leasing is the better option to go for.

Ownership and Flexibility

During a car lease, the leasing company is the registered owner and keeper of the car. This is because you don’t get the option of buying the car as standard (you can request to purchase it at the end). Whereas with a PCP, you will be the registered owner and keeper from the start.

A PCP is also slightly more flexible when it comes to ending the contract early. With a PCP, you could pay the finance off yourself or sell the car and use the proceedings, or you can voluntarily terminate your PCP, which basically means you can hand the car back once you’ve paid 50% of the total finance balance (more on VT here).

With a car lease, you need to request an early termination fee if you want to hand the car back early. This can vary depending on factors such as how far into your lease you are, the leasing company, and the vehicle. As a rule of thumb, the typical charge is 50% of whatever is left.

Mileage and Wear & Tear

Both car leasing and PCP agreements come with mileage limits, excess mileage charges, and policies on wear and tear.

At the start of each, you choose your mileage allowance, which has a direct effect on the amount you pay. At the end, if you’ve gone over your allowance, you will be charged a fixed fee per mile, usually a few pence (although this can be more depending on the car). You’ll know what this charge is from the start.

With a car lease, it is far more straightforward than a PCP, as you’re likely to be handing the car back. So, if you’ve gone over your mileage on a car lease, you’re going to be charged. However, with a PCP, you might be better off buying the car instead of paying an excess mileage charge. Depending on how the extra mileage affects the resell value, you may save some money this way.

The same applies for wear & tear, which refers to the condition of the vehicle upon its return.  If the car has been damaged beyond what is deemed as fair, you’ll be billed. More on that here.

End of Contract Options

With a car lease, you’ve got a few options:

• Hand the car back, free to do whatever you want for your next car

• Request to informally or formally extend your lease

• Request to purchase the car

With a PCP, you’re options are:

• Hand the car back, free to do whatever you want for your next car

• Purchase the car by paying the balloon payment

• Trade the car in against a new one (providing you have equity to do so)

Which Option is Right for You?

Firstly, you need to weigh up how likely you are to buy the car at the end. If you’re not too fussed about buying the car at the end, I would recommend looking at the total cost of both and going for whatever is cheaper. There’s not much point paying more to have the option to buy if you’re unlikely to buy!

If you like the idea of being able to hand your car back early, then I would look at a shorter lease period and compare that cost of that.

We’re on hand to help with any questions or queries you have. Get in touch if you’ve got a question or want help finding your next car.