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A standard leasing contract, such as contract hire or operating lease, is one of the most straight-forward financing options available. Once you have agreed on the terms, a lease consists of monthly payments on your vehicle for a fixed period of time. You are essentially renting the vehicle but are covering the cost over the term rather than paying it all up front.
Leases are becoming increasingly popular, in part because of their flexibility. It is not just in the model you choose as financing and lease conditions can be customised when you agree on a contract, depending on your requirements. For example, there are options when it comes to the initial deposit, monthly payments, contract length, and mileage limits.
The main thing that sets standard leases apart is that there is less long-term commitment compared to other options. Once you have completed your contract, you are free to change models or switch to a different method of funding, without the hassle of trying to sell your vehicle. However, it is worth noting that there can still be significant costs associated with ending a contract early, if you are even allowed to end the contract prematurely at all.
Of course, with a lease you’ll have to hand the vehicle back at the end of your contract. Despite this, cars can be considerably more cost-efficient to lease compared to purchasing outright, especially for vehicles that have a relatively low rate of depreciation. This is because, unlike other funding options, you are only covering the depreciation of the model over your term, rather than funding the entire value of the vehicle.
Personal Contract Purchase (PCP)
PCP contracts are very similar to standard leases, but the critical difference is that you have the option to purchase the vehicle at the end of the contract. Unlike a lease, you can choose to own the car at the end of the agreement by settling an additional 'balloon payment'. A balloon payment is a figure based on factors including interest and the outstanding value of the car.
This means PCP can be a good option if you want to decide at a later stage whether you want to own your vehicle, or if you just want to delay the full payment. It’s worth noting that any given lease or PCP will not be exactly the same, particularly when it comes to the initial deposit and monthly payments. For example, in many cases a PCP contract may work out more expensive overall than a similar lease due to interest charges and having the privilege of deferring your decision the purchase the car until the end of the contract which means you are funding the entire value throughout.
Which is Better?
Both leasing and PCP are flexible financing options that are often more affordable than purchasing a car outright. But which is better depends on your personal circumstances and what you think your requirements will be in the future.
If you know that you’ll only require a vehicle for a set period of time, then a lease is probably the most suitable option. Likewise, leasing is ideal if you want to upgrade your model or switch to something completely different at the end of your contract without the hassle of selling your old car. In contrast, if you think you might want to own the car at the end of your contract but you don’t want to buy it outright, then PCP is the logical choice.
Hopefully you now have a better idea of what the best financing option is for you. The prices we list here at Carparison are for contract hire agreements, which are leases for both personal and business use. If you're after a PCP agreement, we recommend contacting your local dealership!