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Should I Lease or Buy a Car? A Comprehensive Guide

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Want to drive a brand new car but don’t fancy the upfront expense of buying one outright? Leasing may be the way forward. 

Leasing a car means you can drive the latest model for a fixed monthly payment. It’s essentially a long term car rental - you lease the car for an agreed period and hand it back at the end. 

But is leasing the right option for you? In this guide, we’ll look at what leasing is, how it works and how it compares to buying.


What is leasing and how does it work?

What is leasing?

Car leasing is a lot like a normal car rental, only for a longer period of time. You pay an initial sum at the beginning of the lease and then a fixed payment each month. You then have exclusive use of the car until the end of the contract, when you hand it back to the leasing company. 

Car leases come with an agreed number of miles. If you exceed this mileage, you pay extra. You’d also have to pay out if there was any damage to the vehicle at the end of the contract (beyond normal wear and tear). With most leases, road tax and breakdown cover will be included. 

Leasing enables you to drive a new car every few years, and means you don’t have to worry about your vehicle depreciating in value. However, unlike some other finance options, you won’t have the option to own the car.

How does car leasing work?

First off, you’ll need to select your vehicle. The cost of leasing can vary considerably depending on the model you choose, so make sure you know what your budget is before you start browsing. The Money Advice Service has a useful budget planner to help with this. 

Car leasing companies usually order vehicles directly from the factory, giving you the option to choose specs and personalise your car. 

Next you’ll need to select various options, including your mileage allowance. Be as accurate as you can with this because you’ll be charged if you go over the agreed number of miles. 

You’ll also need to choose the length of your lease. Contracts vary in length, from 28 days for a short term lease to four years for a long term car hire. With a longer lease, your monthly payments will typically be lower. 

You may have the option of choosing how much your initial payment is. This will usually be equivalent to 1-12 months’ lease for the model you’ve chosen. The more you pay at the beginning, the lower your monthly payments will be. 

You may also be able to opt for a maintenance package that covers you for routine servicing, replacement tyres and other maintenance costs. If you choose not to take out maintenance cover, you’ll be responsible for all maintenance costs yourself. 

Before ordering your car, you’ll need to be approved for finance. The leasing company will carry out a credit check. 

Once approved, the leasing company will order your car. You’ll pay a processing fee - usually around £150-300 - along with your initial payment. As with other finance deals, you’ll have a 14 day cooling off period. During this period you’ll be able to withdraw from the deal if you change your mind. 

Next up is the fun part - your car will be delivered! You’ll then pay the agreed monthly payments and will have to maintain the vehicle until the end of the contract. For more information about looking after your leased vehicle, see this guide from the British Vehicle Renting and Leasing Association (BVRLA). 

When the contract comes to an end, it’s time to hand the car back to the leasing company. If you’ve gone over your mileage allowance, you’ll pay a charge - usually around 5-10p per mile. If there’s any damage beyond normal wear and tear, you’ll pay for the cost of repairing it. 

In some cases you may have the option of extending the lease rather than giving the car back. Check with your leasing company a few months before the end of the contract to see whether this will be possible. They may also offer a discount on your monthly payments, as the car is no longer new. 


What are my leasing options?

    There are several different leasing options available - the one you choose will depend on your individual needs and preferences.

Personal contract hire (PCH)

Personal contract hire, or PCH, is a leasing option available to private individuals (as opposed to businesses). Personal car leasing has long been popular in the US, where almost 30% of new vehicles are leased. PCH is becoming increasingly common in the UK - the BVRLA recently reported that PCH grew by 23% between 2018 and 2019. 

PCH enables you to drive a brand new car every few years for a relatively low monthly payment. With a personal lease, you will never own the car - your monthly payments will essentially be covering the cost of the vehicle’s depreciation. The leasing company will retain ownership of the vehicle, but this means you don’t have to worry about the car’s resale value. 

This leasing option would suit people who want to drive the latest model but don’t care about owning the car. It’s also good for those who want the flexibility of swapping cars every few years without the hassle of selling a vehicle.

Business contract hire

Business contract hire is similar to personal contract hire, but it’s only available to businesses. Limited companies, partnerships and sole traders may all be eligible for business leasing. 

Contracts generally last for between 12 months and five years, and can be tailored to the company’s needs. 

Business leasing is a popular choice for VAT registered companies as they’re able to claim back some or all of the VAT on the lease. Some manufacturers also offer special rates for business customers, meaning prices may be lower than for personal lease customers.

Short term car lease

Some companies offer short term car leasing. This may be available for both personal and business customers. 

Short term lease agreements usually range from 28 days to two years. Short term leases usually come with higher monthly payments than longer contracts, but they can be a useful option for those who need a greater degree of flexibility. 

A short term lease may be the right option if:

  • You have little or no credit history
  • Your circumstances are likely to change in the near future 
  • You’ve ordered a new vehicle that won’t be ready for a while 
  • Your business has temporary staff, or staff members on a probationary period 
  • Your business is seasonal and you don’t need a vehicle all year round
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      Can I lease a used car?

      Leasing means you can drive a brand new car for an affordable monthly payment - but if you don’t care whether the car is new or not, leasing a used car could be another option.

      Second hand car leasing

      There are plenty of companies that offer used car leasing. The process works in much the same way as with leasing a new car - you select your car, agree the length of your contract and mileage allowance, pay an initial payment and then pay fixed monthly payments until the end of the contract. 

      Leasing a used car is generally cheaper than leasing a new car, as you’d expect. Cars depreciate most in their first year, so a car that’s two or three years old will have already undergone its steepest decline in value. This means your monthly payments are likely to be lower if you lease a used car, compared to an equivalent new car. 

      However, it’s always a good idea to shop around. Leasing companies are often able to secure discounts with manufacturers, enabling them to offer new cars on very cost-effective terms - so do your research and compare similar models on new and used lease contracts to make sure you’re getting the best deal.

      Differences when leasing a used car to a new car

      The main differences when leasing a used car are with the vehicle itself. Most used vehicles offered for leasing will be ex-lease vehicles - so they’ll have been leased new, driven for a few years, and given back to the finance company. 

      Because lease deals come with a mileage limit and require the car to be well maintained, used lease cars are likely to be in generally good condition. 

      If you choose to lease a used car, make sure it comes with a full service history and hasn’t done too many miles. As a rule of thumb, the maximum mileage that is considered ‘good value’ is 15,000 miles per year. So a one-year-old car should have done no more than 15,000 miles, a two-year-old car 30,000 miles and so on. 

      Most companies that offer second hand car leasing only offer approved, high-quality vehicles that have done under a certain number of miles anyway - but it’s always best to double check. 

      As it’s a second hand car, you won’t be able to modify it or choose the colour - you’ll only be able to choose from what’s available. It may also no longer be in warranty, so any existing problems will be your responsibility from the beginning of the lease - but again, check this with the leasing company.

         

      Leasing for businesses

      Leasing is a popular option for businesses, providing access to vehicles without the cost or administrative burden of owning them.

      Can I lease a business car?

      Business car leasing is available to limited companies, partnerships and sole traders. The ability to claim back VAT on a business car lease makes it a particularly attractive option for VAT registered companies. 

      When applying for a business car lease, you’ll have to prove that your business is registered and financially eligible. As with personal leasing, you’ll have to undergo a credit check. Be prepared to provide bank statements, ID, proof of address and other documents. 

      Business leasing works similarly to personal leasing - your business will lease a vehicle or fleet of vehicles for an agreed length of time, paying an initial payment and then a fixed monthly payment for the life of the contract. As with personal leasing, most contracts last between 12 months and four years, although short term leases are also available. 

      Business vehicles tend to rack up plenty of miles, so the maximum mileage allowance for business car leases is often higher than with personal leases. Typically this will be a maximum of 30,000 or 40,000 miles per year, although the amount will vary from contract to contract.

      Company car lease

      Leasing can be a cost-effective way of operating a company car or fleet of cars. If your business is VAT registered, you’ll be able to claim back some or all of the VAT on the lease. If the car is used solely for business purposes, you can claim back 100% of the VAT. If you use it in a personal capacity at all - even just for an occasional trip - you’ll be able to reclaim 50% of the VAT. 

      If you add a maintenance package, you’ll be able to claim back 100% of the VAT on it - this applies to both sole commercial use and mixed use cars. 

      If a company car is used for personal journeys - including commuting between home and work - you’ll pay company car tax on it. You pay tax on the company car’s value to you, which is determined by things like the type of fuel it uses and how much it would cost to buy. 

      You’ll pay less company car tax on vehicles with low CO2 emissions. You can also reduce your tax by paying a contribution towards the cost of the car and only using it part time. For more information on this, see HMRC’s website

      You can also claim your monthly lease payments as an allowable business expense, making them tax deductible. Cars with CO2 emissions over 130g/km are subject to a 15% disallowance, meaning you’ll only be able to claim 85% of the lease payments as a business expense. For cars with CO2 emissions under 130g/km, 100% of the lease payments count as an allowable expense.

      Van leasing

      Leasing a van for your business is much like leasing a car. You can claim back 100% of the VAT on a van lease in all circumstances, as well as 100% of the VAT on any maintenance package. 

      If a company van is used for personal journeys, you’ll have to pay tax on it. This is worked out differently from the tax on company cars. You report a flat-rate value for the van - currently £3,430 - and pay Class 1A National Insurance on this value. This is currently set at 13.8%. 

      You can read more about expenses and benefits for company vans on the HMRC website. 

      Advantages of business leasing

      • Reduced capital expenditure 
      • Improved cash flow 
      • Removes depreciating assets from your company’s balance sheet 
      • Option to add a maintenance package eliminates unexpected servicing costs, making budget planning easier 
      • Lease payments are tax deductible 
      • VAT registered companies can claim back VAT on the lease and maintenance package 
      • Reduced administration
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      Should I lease or buy a car?

      So - should you lease or buy your next car? We’ve weighed up the main advantages and disadvantages of each option to help you decide. If the disadvantages of leasing aren’t a problem for you, and the advantages outweigh them, then it could well be the right choice.

      Advantages of leasing

      • You can drive a brand new car every few years 
      • Leasing often offers the lowest upfront and monthly cost for a new car, particularly for high end models 
      • You can modify the vehicle so it looks exactly how you want it 
      • Monthly payments are fixed, making it easy to budget 
      • You can personalise your lease to suit your needs, with variable contract length, initial payment and mileage allowance 
      • Road tax and breakdown cover are usually included with the lease 
      • You’ll be covered by the manufacturer’s warranty 
      • The option of including a maintenance package enables you to spread the cost of servicing 
      • You don’t have to worry about the car depreciating in value 
      • You avoid the hassle of selling the car - you just hand it back when your contract is up 
      • Leasing is cost-effective and tax-efficient for businesses

      Disadvantages of leasing

      • You’ll never own the car, so you won’t have an asset to sell at the end of the lease 
      • You usually need good credit to get a lease, although there are options available for those with poor credit 
      • You’ll be charged for repair costs if you damage the car beyond normal wear and tear 
      • Mileage is limited, and if you go over your allowance you’ll have to pay extra 
      • You’re locked into the contract and terminating it early isn’t always possible

      Advantages of buying

        • You own the vehicle, so you can do whatever you want with it 
        • If you buy outright with cash you aren’t locked into monthly payments 
        • You’re free to drive as many miles as you like 
        • You can sell the vehicle whenever you want to

          Disadvantages of buying

          • The vehicle will depreciate in value, so you won’t be able to sell it for as much as you paid 
          • Brand new and premium models can be very expensive 
          • You’ll be responsible for all maintenance and repair costs, which can become costly over time 
          • Unlike with a lease, you’ll have to pay for road tax and breakdown cover in addition to the cost of the car 
          • If you pay for the vehicle with a personal loan, the repayments are usually higher than with leasing 
          • Even if you finance the car over many months, you’ll still usually have to pay a larger lump sum upfront than with leasing


          Other costs when leasing

          As always, you’ll have to pay to insure your vehicle, and for fuel. 

          If you choose to personalise the vehicle, you may have to pay extra for modifications. 

          If you choose not to add a maintenance package, you’ll have to pay for any servicing the car needs during the term of the lease. Opting for a maintenance package will mean all routine servicing is covered. 

          If the vehicle is written off during your lease, and the insurer values the car lower than the leasing company values it, you will be liable for the difference - unless you take out GAP insurance. 

          In the event your lease vehicle is stolen or written off, GAP insurance will cover the difference between the amount the insurer will pay out and the amount you still owe to the leasing company.

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          Other finance options

          There are a number of other finance options available that enable you to drive a new car without buying it outright.

          Hire purchase

          With a hire purchase, you commit to buying the vehicle at the end of the contract. 

          It’s essentially a loan for the full cost of the vehicle, with your repayments split over an initial payment and a number of fixed monthly instalments. Once you’ve paid the final instalment, the vehicle is yours - there’s no option to hand the vehicle back to the finance company. 

          The amount you pay each month will be affected by the size of your initial payment and the length of the contract. If you have cash to put down upfront, increasing your initial payment will reduce your monthly instalments and the amount of interest you pay overall.

          Lease purchase

          Lease purchase is similar to hire purchase, but instead of getting a loan for the full cost of the vehicle, your monthly payments only cover its depreciation. The rest of its cost is deferred to a large final payment known as a balloon payment. 

          After paying fixed monthly payments for the duration of the lease and the mandatory balloon payment at the end, you’ll own the vehicle outright. Again, there’s no option to hand the vehicle back. 

          This option offers flexibility, as the monthly instalments and balloon payment can be adjusted widely to suit your needs. The monthly payments are also likely to be lower than with hire purchase.

          Personal contract purchase

          Personal contract purchase, or PCP, is similar to lease purchase in that your monthly payments only cover the amount the vehicle is expected to depreciate.

          However, at the end of the contract you have several different options:

          • Pay a balloon payment equivalent to the resale value of the car and own it outright 
          • Hand it back to the finance company and pay nothing more 
          • Trade it in for a new vehicle with a new contract

          This option offers greater flexibility than hire purchase and lease purchase, as you aren’t committed to buying the car if you don’t want to.


          Car leasing and insurance

          Although car leases don’t come with insurance as standard, some leasing companies do offer packages that include it.

          Car lease with insurance

          With an all-inclusive package, the cost of insurance will be included in your monthly payments. 

          In order to qualify for one of these packages you’ll have to meet the leasing company’s eligibility criteria. This usually includes things like having held your driving licence for at least a year, and having under a certain number of points on your record. 

          While this option offers ease and convenience, it may not represent the best value. If you want the best deal, it’s a good idea to shop around and compare the cost of taking out your own insurance.

          Car lease without insurance

          If you choose not to take out an all-inclusive package, you’ll have to organise your own fully comprehensive vehicle insurance. 

          Your insurance policy must start on the day your vehicle is delivered and cover the full period of the lease. You’ll also need to tell your insurer that the vehicle is owned by the leasing company. 

          For personal leasing, the lease holder should be named on the insurance certificate as the main policy holder. For business leasing, it should be the company or director’s name on the insurance certificate.


          FAQs:

          Can I buy a leased car? 

          With personal contract hire or business contract hire, you won’t have the option of buying the car - you’ll have to hand it back to the leasing company at the end of your contract. 

          However, there are some finance options that enable you to buy the car, including hire purchase, lease purchase and PCP. 

          Can I rent a car for a month? 

          Yes, there are companies that offer short term car leasing. The minimum contract length available will usually be one month, although some companies do offer shorter leases than this.

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          19th of May 2020

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