PCP v Leasing which is the best way to drive a car?

These days few of us would think of paying cash for a car, the fact they’re a depreciating asset means they’re not an investment and so therefore many of us choose to either rent with a view to buying – on PCP – or simply renting – leasing or contract hire.

The main thing to keep uppermost in your mind, whichever finance method you choose is:

low retail price and high residual value.

This will always give you the best deal, whichever finance method you opt for.

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Which is best for me - PCP or leasing?

With so many different kinds of car finance to choose from, it can be tricky to know which is best for you. We’ve compared two of the most popular; personal contract purchase (PCP) plans and contract hire, otherwise known as car leasing – to help you decide.

How do they work?

In essence, both types of finance are similar; both require an initial payment, which varies dependent on factors such as the length of the contract and the value of the car, and then smaller monthly payments throughout the period of the contract.

The idea is that though you may not have the capital to buy a car outright, you can split the cost into smaller, more manageable monthly payments.

There is, however, one key difference between these two types of finance: only PCP allows you to own the car.

At the end of the contract, which is normally between two and four years long, a PCP plan will give you the choice of making a ‘balloon’ payment or handing the car back, whereas a contract hire or leasing deal will require you to return the car.

How much do they cost?

It varies. Every car has a residual value – the amount of money it’s worth at the end of the contract – and the combination of the initial and monthly payments, will have to, at least, cover the difference between the car’s residual value and its value when new.

The cheapest deals, then, will be for cars with a low purchase price and very strong residual values. A car that costs £10,000 when new and is still worth £7,000 at the end of the contract will be cheaper to finance than one that retails at £20,000 when new and is only worth £10,000 at the end of the contract.

The length of the deal will have an effect, too, because a vehicle’s depreciation (the rate at which it loses its value) reduces every year. Cars’ values fall the moment they leave the dealership, but by the time they’re ten years old, they’re only losing a few pounds a year in value.

It’s worth bearing in mind, however, that PCP deals will often also factor a certain amount of interest into the price, whereas leasing deals, which are essentially little more than long-term rentals, will not have any interest to pay; of course, there’ll be a bit of profit margin in there for the broker.

Remember, the Holy Grail is low retail price and high residual value.

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Woman smiling whilst driving car

Which is right for me?

It depends on your circumstances and your attitude towards car ownership.

Generally speaking, a PCP plan will have a variable initial payment which you can choose, but the smaller the upfront deposit the larger the monthly payments; a leasing deals’ initial fees will be a certain number of months’ payments up front, this will rarely exceed the equivalent of nine months’ payments.

If you’re thinking of owning the vehicle, though, a PCP plan would be best. It will give you the option to buy the car at the end of the deal, and it’s often a good scheme for people who intend to keep their car for a long time.

If, on the other hand, you want to change your vehicle regularly and don’t care whether or not you own it, then you might want to explore contract hire or leasing further.

The choice is yours, but don’t let your heart rule your head and always check that you can afford the monthly payments without having to sacrifice too much.



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