Leasing vs PCP – which is right for you?
Personal Contract Plans (PCP) and leasing (also known as contract hire) are very similar forms of finance in which they are both ideal for car buyers who intend on changing their car frequently.
But they are different plans, and therefore they both need to be considered for their differences before you take one out.
Just so you know, CarShop does not currently offer a personal leasing plan, but can offer competitive HP and PCP finance packages which you can find out more about here.
Here are the factors you need to bear in mind when deciding between PCP and leasing:
Options at the end of the agreement
PCP is essentially a form of hire purchase, in that the finance company technically owns the vehicle until all payments have been made, however you will be the registered keeper of the vehicle.
At the end of the agreement you can pay a balloon payment and own the vehicle, but there are other options to consider too.
You can also:
· Simply hand the car back to the finance company (subject to mileage and the car being in good repair and condition)
· You can part exchange your vehicle for another. The agreement will be settled and the equity (where the part exchange value exceeds the Final payment) will contribute to your new agreement.
With leasing, you are technically hiring the car for a set period of time and you will not have the option to own the vehicle; you will simply hand it back at the end of the agreement.
One benefit is that you won’t have to take it anywhere. The leasing company can pick up the car from your home or workplace and even drop off your new one if you arrange a new agreement with them.
If your circumstances change
At the beginning of any finance agreement you will sign to confirm you are unaware of circumstances that will affect your ability to pay the loan.
With a PCP agreement you do have greater flexibility should your circumstances change, for better or for worse, like needing a bigger car sooner for a growing family or you get a new job that requires a longer commute.
Whatever the situation, you can get yourself into a new car (subject to vehicle eligibility) as easily as if you’d bought a car on a Hire Purchase agreement, with most dealers being able to settle your previous agreement on your behalf. Depending on how long into the agreement you are and how much deposit you put down, you may get some negative equity because of this.
Leasing offers less flexibility than PCP if your circumstances change. Your only option is to cancel the agreement and will typically will have to pay a large sum to do so.
If you are considering leasing and think your circumstances may change, it may be best to look at a car that will be adequate for your needs throughout the contract period.
Similarly to Hire Purchase, you can put as little or as much as you want down as a deposit for a PCP contract and this will affect your monthly payment.
Be wary of putting in a large deposit. It’s true that a larger deposit will reduce your monthly payments, but you will have to consider whether you would have the same funds at the end of your agreement. For example, say you put £4,000 down as a deposit, will you have the same again for your next car to get a similar deal?
Leasing deals are structured differently to PCP deals. When looking at lease deals you’ll see an ‘initial payment’ followed by the ‘monthly payment.’
The ‘initial payment’ refers to how much you need to pay up front and is shown either 1, 3, 6 or 9 times the monthly payment.
For example, you may see a 9 + 35 deal, which is a 36 month agreement with an initial payment equivalent to the sum of 9 monthly payments, followed by 35 fixed monthly payments.
As with PCP, the higher initial payment you choose, the lower the monthly payments. But it is worth considering if you’ll be able to do the same again at the end of the agreement for your next vehicle so you don’t get stuck. Bear in mind that there may also be a processing fee of a few hundred pounds on top of the initial payment, which is shown separately.
Whatever initial payment you choose will only affect the subsequent monthly payments; the total amount you’ll be paying throughout the term will be the same. Also, in most cases, increasing the initial payment doesn’t have a great impact on the following monthly payments, so it may be better to keep it as low as possible as you won’t see that money again.
Tax, insurance and maintenance
On a PCP agreement, you will have to arrange your own road tax as normal. This can easily be done through the government website. Doing it this way will include instructions which help you through the process step by step.
You will also need to arrange your own insurance. This can be done through comparison websites or through insurers directly.
With leasing, road tax is included in the monthly payments, so you don’t need to worry about this.
Like PCP, you will need to arrange your own insurance, but with one small difference. With a lease car, you would need to make your insurer aware that the car you are driving is on a lease, but should you have an accident in a lease car, you’d let your insurer take care of things as normal.
Be aware that some insurers won’t insure cars on a lease.
With both PCP and personal leasing, you are responsible for the maintenance of the car. If you fail to do so, you will be imposed charges when (or if) you hand the car back at the end of the agreement.
Many leasing companies can include the cost of routine maintenance in the monthly payments and you’d have to pay for any additional work, though this is very unlikely as the car would be brand new from the beginning. But you may have to replace things like the tyres!
PCP agreements can also have maintenance included, though this is typically available at main dealers and incentivised by the manufacturer. Regarding MOTs, unless you buy a used car on PCP, it’s unlikely you’ll need to MOT your car unless the finance term is greater than 3 years.
Leasing vs. PCP – Which should you choose?
The bottom-line is this is entirely up to you. While PCP gives you greater flexibility if you are unsure about your future circumstances or your choices at the end of the agreement, personal leasing can be cheaper than financing even a used car. This is because the finance companies claim VAT back, so will pass the saving onto the customer, but there is very little flexibility if your circumstances change and the fact is, you’ll never own the car. So, in a sense you’ll have nothing to show for the several thousand pounds you may spend over the agreement.
On the flipside, leasing puts you into a brand new car in as little as every 12 months without the worries of something going wrong, as you have the peace of mind of the manufacturer’s warranty. Of course, there may be a wait if the leasing company doesn’t have the car you want in stock, or if you want to add optional extras, whereas if you buy a used car on PCP you could drive away the same day.
CarShop doesn’t currently offer personal leasing, but we do offer competitive rates on our finance packages, and you can start your application today!