Leasing vs PCP: Which one is right for me?

Should you lease or buy a car?

Your car is likely to be your second biggest financial commitment after your house – so you’ll want to make sure that you’ve got the best deal possible.

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

Ownership of many of the big-ticket items – phone, laptop, washing machine – is becoming less of a dealbreaker. Many people are instead opting for finance deals to get the latest products of a monthly price 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 right for you.

We’ve broken down the difference between two of the most popular ways to finance your new car – Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) – to make life a little easier for you.

Car leasing versus PCP: Overview

What is car leasing?

Personal Contract Hire, otherwise known as car leasing, is a popular method of financing a car over a set period, but without the option to own it at the end.

It’s essentially like renting a house.

For the length of your contract – normally between 24 and 48 months – the car is yours. You can take it abroad, go on jaunts up and down the country and proudly display it on your drive.

But once your agreement is over, you’ll need to hand the car back to your funder.

You’ll then be free to take out a new lease contract. It’s hassle-free, and it’s a great way of being able to drive the latest models without the faff of needing to sell every few years.

You can even add a maintenance package to your lease, removing some of the financial uncertainty that comes with needing to maintain a vehicle.

It’s worth bearing in mind that you could face additional charges at the end of your lease deal if you exceed your mileage limit or return the car in a condition that falls outside of the BVRLA’s Fair Wear and Tear guidelines.

But otherwise, your funder takes the risk of the car’s depreciation, so you’ll never be charged extra if your car is worth less at the end of your contract than was forecast.

Car leasing FAQs

Am I eligible for car leasing?

You’ll need a credit rating of good to excellent to be approved for a car lease deal.

If your rating is lower than this, your finance application could be rejected as the risk of lending to you is higher.

But we work with a large range of funders here at Carparison, and your leasing consultant will do everything they can to secure you the deal that you want.

Does car leasing have an annual mileage allowance?

Yes, leasing deals have an annual mileage allowance, which is normally between 5,000 and 30,000 miles per year.

The higher the mileage you choose, the more expensive your monthly payments will be, so it’s worth nailing down exactly how far you’re likely to drive over the course of your lease to avoid overpaying.

How does car leasing work?

When you take out a PCH deal, you’ll first need to pick the length of your agreement (between 24 and 48 months), your annual mileage and your initial rental.

This upfront payment will be the equivalent to between one- and-nine months lease cost, but the more you put down at the start, the lower your monthly payments will be.

When the agreement is over, you simply hand the car back to your funder and you’re free to take out another lease deal on a brand-new model.

Can I end my car lease early?

You are normally tied in for the duration of your agreed lease term, but there are ways you can terminate your PCH contract early if you need to.

However, there are generally early termination fees involved, which can be costly, so it’s worth keeping this in mind from the very beginning of your lease.

What is PCP?

Personal Contract Purchase, or PCP, is a finance method that allows you to spread the cost of your next car over a fixed period, with an optional balloon payment at the end.

If, at the end of the contract, you don’t want to buy the car, you can either hand it back or part-exchange it against the cost of a new contract.

The final payment does help to bring down the monthly cost because it offsets the amount that you’ve borrowed, and can be a more affordable way to own a brand-new car than buying it outright or taking out a loan.

PCP FAQs

Am I eligible for PCP?

To be eligible for PCP, you’ll need to have a good to excellent credit score.

You might still be considered for finance if your credit score is fair, but your interest rate might be higher.

Does PCP have a mileage allowance?

Yes, you’ll choose your annual mileage allowance before you take out a PCP agreement.

Your annual mileage has an impact on the wear and tear of the car, and so will affect the car’s value at the end of the contract. Choosing the right mileage allowance will help to make sure you’re not overpaying.

How does PCP work?

Before you sign on the dotted line, you’ll choose the length of your contract and your annual mileage allowance.

Both will have an impact on your monthly payment, as will the upfront deposit you put down. This is normally around 10% of the car’s value, but this can vary.

Your monthly payment will also factor in what’s called the Guaranteed Future Value. This is what your car is forecast to be worth at the end of your contract, taking depreciation into account.

You’ll also pay interest, which is normally around 4-7% APR. This can vary though, depending on your circumstances and the terms of the deal.

At the end of the contract, you can either pay the balloon payment to own the car, return the car to the funder, or part-exchange it and take out a new PCP contract.

Can I end my PCP contract early?

Most PCP contracts are fixed for an agreed term, but you do have options if you want to end your PCP deal early.

If you’ve paid at least half the value of your vehicle, you might be able to end your contract early. If not, you could still end your contract by paying the difference between the value of the car and how much you still owe.

Car leasing vs PCP: What's the difference?

The main difference between car leasing and PCP is that PCP allows you to buy the car at the end of your contract, while leasing doesn’t.

However, both allow you to finance the cost of your next car over a set period.

But if car ownership is your biggest priority, but you don’t want to pay outright or take out a loan, then PCP is an excellent way of spreading the cost across several years.

If you’re not fussed about owning the car, and you want to be able to drive the latest models, then leasing is the right option for you.

Car leasing vs PCP: Which is cheaper?

Leasing tends to work out cheaper than PCP because of the optional balloon payment at the end of a PCP contract.

If you’re looking at getting your next car on PCP, you’ll want to make sure that you’ve included the total running costs in your calculations – including insurance, fuel and maintenance costs – so that you have a good idea of how much the car will cost you over the term of your deal.

You’ll want to do this if you’re leaning towards leasing too.

Looking at the whole life costs will make it easier to budget, so you’re not spending more on your car month to month than you expected.

You’ll also need to consider how much money you can afford to put down upfront.

Normally, with a PCP deal you’ll put down a deposit of around 10% of the car’s value, though this can vary. Some funders might even give you money towards the deposit with certain deals, so it can pay to shop around.

Leasing is slightly different.

When it comes to a PCH deal, you’ll pay what’s called the initial rental.

This is normally the equivalent to between one- and nine-months lease. The more you pay upfront, the lower your monthly payments will be.

The monthly payments for both leasing and PCP will vary depending on a set of factors.

When it comes to leasing, you’ll need to select the terms of your deal before you do anything else. This includes your initial rental, along with the length of the agreement and your annual mileage allowance, as well as whether you want to include maintenance.

All of these will have a bearing on how much your monthly rental will be.

PCP is similar. Your monthly payments cover the difference between what your car cost when it was new, and what it’s forecast to be worth when your agreement ends. This is called the Guaranteed Future Value (GFV).

It’s likely you’ll also have to pay interest on this, which generally varies between 4% and 7%. If you shop around, you might be able to find some 0% finance deals on some models, if you’re not overly fussy about which car you want.

Car leasing vs PCP: Car maintenance

With both leasing and PCP contracts you are responsible for the maintenance of your vehicle.

Most leasing brokers will offer a maintenance package that can be bolted onto your monthly payment to make budgeting for your car costs much easier.

These can vary, but most maintenance packages for your car lease will include repairs and replacements caused by fair use of the car, like tyres, breaks and exhausts. If you’re in any doubt about what your maintenance package includes, your leasing consultant will have all the answers.

When it comes to PCP, part of your car’s GFV is based on you returning it – if that’s what you choose to do – with a full manufacturer service history, so ensuring you maintain and service it properly is essential.

You don’t officially own your PCP car until you pay the balloon payment at the end, so it is a little more like a lease car during your agreement.

Some funders will also specify where you can get your car serviced, so it’s always worth checking the small print before you sign on the dotted line. If you choose to go elsewhere for your service in this case, your funder can invalidate your GFV, and potentially issue you with a fine.

Car leasing vs PCP: Which is better?

At the end of the day, choosing your car finance method is going to come down to your personal circumstances.

Neither PCP nor leasing is better than the other, but one might be right for your specific circumstances.

If you’re after something more flexible and ownership isn’t a big priority, then leasing is likely going to be right for you. Because you’ll never own the car, leasing gives you the freedom to easily hand back the car and take out a new contract – and often for less than PCP.

But if owning the asset is important to you, but you still want to spread the cost, then PCP is likely going to be the right choice.

Your budget will also determine whether leasing or PCP is right for you. Leasing tends to be cheaper, because you’re sacrificing ownership for ease.

The final consideration is the position you’ll be in in the next few years when your contract comes to an end.

Again, if you know your financial, work and personal situation will allow you to purchase the car at the end and own that asset, then it’s PCP for you.

But if your situation is a little more flexible, and you want the option to either downgrade or upgrade your car depending on where you are, then you might want to look at car leasing.