Leasing, personal contract hire, personal contract purchase, hp and conditional sale explained. which car leasing option is best for you? what are the pros and cons of each type of car leasing?
Leasing is becoming an increasingly popular method of running a car. like a long-term car rental agreement, you pay a monthly fee to use a car for a fixed period and mileage. at the end you simply hand back the car to the leasing company.
Personal contract hire
Fixed monthly payments are calculated based on the vehicle’s expected depreciation – the difference between the purchase price and the resale value at the end of the agreement, taking into account age and mileage. The better a car holds its value, the lower your payments will be, which could make it possible to lease a more prestigious car than you would have bought.
- Drive a brand new car every two or three years without worrying about it depreciating, running out of warranty, or how you’ll sell it on.
- Lower costs: leasing requires a smaller deposit and lower monthly bills than you’d pay if buying the car.
- No surprises: payments are fixed and can include a maintenance package to help you budget; road tax is usually included.
- Hassle free: at the end of the contract you just hand the car back.
- If you are vat-registered you can reclaim 50% of the vat on finance payments, and 100% of the vat on a maintenance agreement.
- There’s no option to buy the car at the end of the contract.
- You’ll have to take out comprehensive car insurance because the car isn’t yours until the end of the agreement.
- Exceeding the mileage limits you’ve agreed can be very expensive.
- Those who want to run a new car every few years with fixed monthly bills and no commitment to buying the car outright.
Personal contract purchase (pcp)
If the thought of handing back the car at the end of a lease rankles, a pcp offers you the option to buy it. You’ll pay a deposit, followed by low monthly payments for the remainder of the contract. A minimum guaranteed future value (mgfv) is also calculated. also known as a balloon payment, this is the amount you’ll have to pay to take ownership of the car at the end of the lease. Alternatively you can part-exchange the car for a new model. If it’s worth more than the mgfv, you get the higher amount as a deposit on the next car, if it’s worth less, you still get the mgfv. The third option is to simply hand the car back to the leasing company. agreements can include maintenance of the car.
- Fixed monthly costs make budgeting easier.
- Requires only a small deposit and lower monthly payments than if you’d bought the car, giving you access to more prestigious models.
- Flexibility: the balloon payment allows you to defer payments and can be refinanced at the end of the agreement.
- If you decide not to buy, you can just walk away.
- You avoid the risk of ending up in negative equity – with your car worth less than the repayments outstanding.
- As a method of buying it will work out more expensive than a hire purchase (hp) agreement.
- You’ll need comprehensive insurance because you don’t own the car until the end of the contract.
- Exceeding agreed mileage limits will incur extra costs.
- Having your cake and eating it: drive a more expensive car than you would buy outright, and decide later whether to keep it or hand it back.
Hire purchase (hp) and conditional sale
Hire purchase (hp) is a simple way to finance a new car. you pay a deposit followed by monthly payments while you use the car. Only when the full cost has been met do you take ownership. The cost is based on the price of the car, the size of your deposit and number of instalments.
- You’ll drive a car you couldn’t afford to buy outright, knowing that once you’ve met all the payments you’ll own it.
- The loan is secured against the car which could make it easier to get the finance and at a reasonable interest rate.
- Overall you’ll pay less to own the car than with other forms of finance, but monthly payments will be higher.
- Until you’ve paid off the loan you can’t sell the car without written permission from the creditor, and if you fall behind with payments the creditor can repossess the car.
- Interest rates can be high, depending on your credit rating. be sure to negotiate the best rate and shop around using the apr to compare deals.
- Watch out for hefty ‘option to purchase’ fees payable at the end of the contract.
- Conditional sale is similar to hp, with one main difference: there are no added fees to pay, so once you have paid your instalments in full you take ownership of the car without any final balloon payment.
- Driving the car of your dreams before you can afford it. Just make sure you get a good deal by shopping around, comparing the apr and total amount you’ll have to repay.