Leasing vs PCP: Which one is right for me?

Debating between leasing a car or buying a car?

With a car being your second biggest financial commitment, you want to make sure you've got the best deal possible

We live in a world where there are a multitude of ways and means to get your hands on the things you need to live a comfortable life.

Ownership of anything - phone, laptop, washing machine - is becoming less of a dealbreaker, with many people opting for finance deals to get the latest products for a monthly payment that suits their budget.

Getting behind the wheel of a brand-new car is no different.

There are many ways you can get your dream car for a price that doesn't give you nightmares - but it can be a hassle working out which finance product is the right one for you.

We've broken down the difference between two of the most popular finance options - Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) - so that you can get the best deal for the best car. 

Despite their similar-sounding names, PCH and PCP are two different beasts.

PCH, or car leasing, works much more like renting a house, while PCP delays the bulk of the payment for the car until the end of the contract.

But which one is right for you?

Leasing versus PCP: Overview

What is car leasing?

A car lease, otherwise known as Personal Contract Hire (PCH), essentially works the same way renting a house does.

You decide on the lease length (normally between two and four years) and annual mileage, pay an initial rental of either three, six or nine times the monthly payment, and the car is yours to drive for as long as your contract lasts.

The car you choose will never truly be ‘yours’ – your funder will be the owner, and you’ll have to return it to them at the end of your contract – but it’s a cost-effective way to drive some of the newest cars without having to pay huge amounts of money upfront.

Other than your fixed monthly payments, all you have to spend out on is the usual running costs like fuel, insurance and maintenance.

You can even add a maintenance package to your lease deal, removing some of the financial uncertainty that comes with having to maintain a vehicle. Maintenance packages cover a lot of disposables, like tyres and wipers, so you can easily add these into your monthly budget.

Vehicle Excise Duty (otherwise known as road tax) is also included – and not only do you not have to fork out for it, but you also don’t have the hassle of trying to remember to renew it each year.

Leasing a car couldn’t be simpler.

Remember, that you can incur additional charges if you exceed your mileage limit or return the car in a condition outside the fair wear and tear guidelines all funders abide by.

But otherwise, your lender takes the risk if the car depreciates in value more than initially expected, and at the end of the agreement you’re free to take out a new contract.

What is PCP?

PCP, or Personal Contract Purchase, was originally designed to be used by people who wanted to put down a smaller initial deposit and lower monthly payments than a traditional Hire Purchase (HP) agreement.

The majority of the cost of the vehicle is set outside until the end of the agreement, with this final payment known as the ‘balloon payment’.

PCP almost bridges the gap between leasing and HP – unlike leasing, you have the option to buy the car at the end of the contract, but like leasing you can just return it and move on.

However, a lot of the time the payments are more expensive than PCH payments, because you’re essentially borrowing the full value of the car and paying back the depreciation value plus interest.

And if you want to own the car at the end, you’ll have to cough up the balloon payment (approximately a third to a half of the car’s initial price).

You’ll also need to consider the APR interest rate on whichever PCP deal you’re looking at. This is the amount you pay each year to borrow the money from the finance provider. It’s normally covered in your lease agreement and not shown in the contract, but it is something to bear in mind with PCP.

Should I lease or buy a car?

If you’re debating between leasing and PCP, there are a few questions you can ask yourself to help make the decision.

Thinking about how you’re going to use the vehicle, whether you want to own it eventually and what you’re willing to spend per month is a good place to start. If you really care about ownership, then PCP is going to be the right choice.

However, research has shown that most people don’t go to pay the balloon payment at the end, instead opting to give the car back and take out a new agreement.

If this is the case for you, then it’s likely going to work out cheaper to lease a vehicle, because the monthly payments tend to be more affordable.