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Understanding the Pros and Cons of Car Leasing vs. Financing

Car Leasing vs. Financing

Owning a car is convenient – it means you don’t have to rely on anyone to get to where you need to be. However, buying a car is not that easy for many of us, due to the price tag that comes with them. This is where leasing and finance come in. There is a range of options to make owning a car easier to manage, and even car finance bad credit options. Read on as we compare car leasing and financing to decide which is best for you.

What is car leasing?

Car leasing allows you to finance a car, without having to own it. Because of this, it’s a popular option for those that don’t have the money to purchase a car outright. Essentially, leasing is similar to a long-term rental agreement that differs in length depending on what you agree with your lender. During this period, you’ll pay a sum to use the car – the cost of these payments is determined by factors such as the purchase price, the overall lease term, estimated depreciation, and service and maintenance that may be required.

There are two main types of car leasing – a personal contract hire which is designed for individuals and business contract hire which is a way for companies to hire the vehicles they need.

The Pros

There are  benefits that come with choosing to lease a car, which include:

  • Lower monthly payments: Leasing a car tends to come with lower monthly payments as you are simply paying for the depreciation of the car when it’s with you, in contrast to other types of finance that lead to ownership.
  • Access to new models: If you like a specific make or model of car that would be out of your price range to purchase, leasing may be a more affordable option. You could enjoy the latest technology and styles as leasing doesn’t tie you into a purchase.

The Cons

Whilst there are benefits to leasing a car, it also helps to take a closer look at some of the disadvantages that may help you to make a more informed decision, such as:

  • No ownership: One of the most obvious disadvantages is that you won’t own the car at the end of the lease. Whilst you can take out another lease agreement when your term is over, you will not have the chance to own the car.
  • Mileage restrictions: When you enter into a lease agreement, you may have a set number of miles that you cannot exceed. If you drive further than is stated in your contract, you will be subject to charges.

What is car finance?

As well as leasing options, there are a range of car finance agreements you can choose from that allow you to purchase a car in a more affordable way. There are various types of car finance, some of the most popular being:

Hire purchase, which allows you to pay your car off in monthly payments over an agreed period, and when the payments are made, you own the car.

PCP agreement, which requires you to make fixed monthly payments for a set period – usually 3-4 years – and at the end of the term, you can choose to pay a balloon payment to own the car, give it back, or take out a new agreement on another car.

The Pros

With a range of finance options to choose from, you’ll need to know the pros so you can make your decision, these include:

  • Ownership: At the end of most finance agreements, like PCP and HPyou will own, or have the option to purchase your vehicle.
  • No mileage restrictions: Most finance agreements don’t state that you can only drive a certain number of miles – you can drive as much as you like and not incur extra charges. Although this may change depending on your lender.
  • Trade-in Value: When you finance your car and pay a monthly sum towards it, you will build equity within the vehicle. This means you will be able to trade it in or sell it at the end of your finance agreement.

The Cons

And of course, you’ll need to weigh up the cons!

  • Higher monthly payments: Finance may come with higher monthly payments as you’re paying off the entire cost of the vehicle in some cases, depending on the type of finance you choose.
  • Depreciation: Cars depreciate over time, so you may find that you have negative equity if you decide to sell or get rid of your car before you’ve paid off the loan.
  • Maintenance: Because you own the car – or are on your way to owning it – sometimes maintenance and repair costs are yours to deal with. This can make owning a car more expensive.

Which is right for you?

Car leasing and car finance have one main difference, and that is ownership. If you’re not worried about owning a vehicle, and you’d like to take advantage of new models and tech, leasing could be the best option for you. If you’d like to own your vehicle, but you don’t have the money to pay for it outright, financing allows you to pay for it in more affordable chunks. Consider whether ownership is something that’s important to you, and you’ll be able to decide which option suits you best.