Car Leasing or PCP: Which Is Better?

Car leasing and PCP explained
Leasing vs PCP: pros and cons of each
Deciding which suits your needs

Stuck on whether to get your new car on a lease or a PCP deal, or simply unsure what each of those entails?

We don't blame you.

There's lots of things to consider when deciding on the type of deal that best suits your needs, and although there's some crossover when it comes to the terms of a car leasing and a car finance PCP contract, there's also some key differences as well which are bound to affect what you pay and the kind of car available to you. We're here to give you the rundown on what those differences are.

So sit back, relax, and just let us do the driving.

What is PCP?

Personal Contract Purchase (PCP) is the most common means of getting behind the wheel, with the majority of Britain's motorists choosing to obtain finance this way.

It works like this:

Find the car that takes your fancy, then agree on the deposit amount, contract length and expected annual mileage, which can all make your monthly payments lower or higher

Pick up the keys and get driving, whilst keeping up with your fixed monthly payments, which are protected from market changes by the car's Guaranteed Minimum Future Value (GMFV)

Finally, you either hand your car back at the end of the finance agreement without charge, or swap it for a new model and use any equity towards a deposit on your next car, or you can buy it outright by paying a final lump sum or 'balloon payment'

The cash amount involved in this optional final payment at the end of the PCP agreement is determined by the finance provider at the start of a deal, who will then calculate the GMFV of your car at the end of the contract.

The exact cost of your deal's monthly payments is calculated by the difference between the car’s retail price when you first receive it and its value at the end of the agreement. Usually, this will amount to a third or one half of the vehicle's initial price. Basically, you'll be borrowing the full value of the car and paying interest on the remaining debt.

What Is Car Leasing?

Unlike PCP, car leasing, otherwise known as Personal Contract Hire (PCH), is more of an unknown but it is steadily growing in popularity and is basically a long-term rental contract.

It works like this:

Find the new lease car that takes your fancy, then agree on the contract length, initial payment and other terms with the provider
Pick up the keys and get driving, whilst keeping up with your regular monthly payments
At the end of your lease contract, simply hand your lease car back to the leasing company (subject to a final fair wear and tear inspection for excess damage, as per the BVRLA fair wear and tear guidelines), and either walk away or take out another lease deal on your next car

Like with PCP, if you exceed the agreed annual mileage allowance limits, you'll have extra fees to pay. It is also possible to extend your lease agreement for a few months, but again, usually at the cost of a fee.

If you end up becoming attached to your lease car (or it to you!), then there's no harm in asking if you can buy it at the end of your lease agreement, though there's every reason for that request to be refused as it's not part of the standard agreed-upon leasing process.

What Is the Difference Between PCP and Lease Deals?

As you've likely gathered, the biggest difference between leasing and PCP deals is the final lump sum or balloon payment which lets you buy the vehicle outright at the end of a PCP deal. You can also be a party pooper and just walk away, which is perfectly okay too.

On the flipside of that, leasing lets you take out a deal on a car for shorter periods of time, typically lasting anywhere from 2 to 4 years, but it can be lower if desired. Leasing also offers relatively low monthly payments in comparison with PCP, which can often be the deciding factor for some people. Allowing you to drive a nicer or newer car than you could afford on PCP.

Furthermore, unlike with car leasing, PCP works like a loan so you have to consider APR interest rates with PCP, which is usually between 4-8%, but sometimes as high as 20%. With leasing, this is all covered in the monthly payments.

Which is Cheaper: Lease or PCP?

A PCP contract usually costs more than an equivalent leasing contract. That's because of the extra flexibility that comes with a PCP deal, like being able to own the vehicle at the end of the contract.

Whilst a used car on PCP can sometimes work out cheaper than a new lease car, getting a new car through leasing is usually going to be cheaper than getting a new car on PCP.

If you’re looking for a luxury vehicle like an Alfa Romeo, a Mercedes-Benz or a BMW, it can often be cheaper to lease than buy because these vehicles hold their value and depreciate less, thereby costing less to lease per month. So leasing can grant you more luxury and a shinier badge, whereas a heftier price tag will be attached to the same vehicles on PCP deals.

If in doubt, seek alternative quotations by getting a PCP quote on your desired car, and then a leasing quote on the same car . . . and compare.

Is There a Difference When It Comes to Electric Cars?

Yes. Basically, if you want an electric car, you're better off leasing it.

That's because electric technology is moving fast, so if you end up owning one through paying the lump sum on a PCP deal that's lasted three or four years, you could be left with an electric car that's not worth much. Which is why a lot of Tesla's are leased rather than bought outright or through PCP.

What if I Want To Terminate My Contract Early?

Like a winding road, life can throw up a lot of unexpected twists and turns. It's possible that your work or life situation might change, meaning that you will no longer be able to afford the fixed monthly PCP or car lease payments.

It happens. Even to the best of us.

Fortunately, PCP deals are fairly compassionate when it comes to being able to end your contract early, letting you do so as long as you’ve paid 50% of the deal's total finance back to the car finance provider. It's important to note though that this doesn't necessarily equate to being halfway through your contract in terms of years or months, as 50% of your total finance also includes any admin fees and the value of the balloon payment.

Your finance provider could make the cost manageable by letting you ‘trade down’, which is when you trade your car for a cheaper model, thereby lowering the cost. What will happen is that the outstanding finance will then be carried over to your new vehicle's deal.

You can also end a car lease deal early but the penalties for doing so will be harsher, as lease deals are by their nature more stringent and uncompromising, not least with their early termination clause. To put it bluntly, you'll be faced with hefty charges – usually 50% of any remaining finance, plus an early termination fee.

Ouch!

Lease or PCP: Pros and Cons

Pros of Leasing

Low monthly payments compared with PCP
Being able to drive a higher-end luxury and higher spec car for a more affordable price
Shorter-term contracts

Cons of Leasing

Harsher and more stringent contract terms
Initial payment, whereas PCP often requires no deposit
Only being able to lease used cars
Leasing is more difficult if you have a poor credit score

Pros of PCP

More flexibility for ending contract early
Option to buy or trade-in car at end of contract
Offers finance on both new and used cars
Takes poor credit scores into consideration

Cons of PCP

Higher monthly payments
Having to pay interest

How Do I Know Which One is Right for Me?

Toss a coin.

Just joking . . .

Truth is, there's no 'one size fits all' answer when it comes to that million dollar question. But in general, if you want a new or used car with the potential of owning the car at the end of the agreement, then obviously your best bet is PCP. On the other hand, car leasing is the way to go if you plan on switching cars every couple of years (2-4), such as for business or work needs, or if you just want lower monthly payments.

If you think that you might want to own a car at the end of an agreement, again, probably opt for PCP, but it's still a good idea to weigh up the benefits and potential lower monthly costs that you'd get when taking out the exact same car on a lease agreement.

It's worth noting that a lot of people actually take out a PCP deal and end up treating it like a car leasing deal because they have no real intention of putting down that optional final payment and owning the car at the end of the contract, whereas they could have gotten cheaper monthly payments if they'd opted for a car lease on the same vehicle.

Also, the crown jewel of car ownership might not be for everyone. As alluring as it may seem, car ownership means being responsible for maintenance and repairs which only increase the older your car gets, particularly if it's already racked up a ton of miles on a PCP deal. So think about how important car ownership means to you before handing over that lump sum for the optional final payment. With leasing, you have the freedom of mind not to have to worry about what happens to the car once you hand it back.

Of course, there are other ways to pay for a car besides PCP and car leasing, such as through a bank loan, hire purchase, or simply buying a car outright (probably not a realistic option unless you have a mountain of spare cash lying around).

Read more:

Leasing With LeaseLoco

As an authorised and regulated leasing company, we offer you the best car leasing offers to suit your needs, thankfully with road tax and the full manufacturer's warranty included (and, more often than not, full breakdown cover).

Best of all, our very own Loco Score ranks the latest car leasing deals on brand new cars from best to worst so that you don't have to. We compare the best prices to make sure you get the most for your money and the best monthly payments.

With that in mind, why not check out our car leasing offers and pick up your favourite deal on your brand new car!

Are PCP contracts worth it?

Often the cheapest way to get a car is using PCP finance on a used car. When it comes to new cars though, leasing (personal contract hire) is nearly always the cheapest option, followed by PCP then HP. What's best for you depends on a few factors.

Which is better value PCP or PCH?

If you plan on paying the optional final payment on a PCP deal and owning the car for 5+ years, paying for the maintenance costs and keeping the car long term, then PCP finance is better. If you plan on changing car every 2-4 years or don't plan on paying a large final payment, then leasing is better. PCP often requires a large deposit whereas leasing doesn't require a large initial rental payment.

What is the difference between personal contract purchase and hire purchase? (PCP Vs HP)

The difference between PCP and HP is that HP is more expensive, as you are paying the full amount of the car rather than the amount the finance lender predicts the car will lose over the term length. PCP and HP both often require large upfront payments.

Hire purchase (HP) used to be more popular than it is now, with less and less people now opting for a HP deal. Unlike with PCP finance, you don't pay off the amount that the finance lender predicts that the car will lose in value over the contract length. Instead, you pay off the full value of the car. Making monthly payments more expensive.

Who owns the car on a PCP deal?

The finance company owns the car, even if your V5C document says that you are the registered keeper. Only once you have paid the final payment will you own the car.