Car leasing vs buying

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Buying a car gives you full ownership of the vehicle, but unless you have a lot of spare cash available you're looking at paying significant interest on car loan. In contrast, leasing can give you flexibility to change your car regularly and it comes with lower costs. But with leasing, you’ll never own the car. This guide explains all you need to know about leasing compared to buying a car. 

How does car leasing work? 

Car leasing is a way of renting a car for a longer term. You put down an initial deposit and then pay fixed monthly instalments for the remainder of your contract.  Once the contract has ended, you return the car and have nothing more to pay as long as you’ve kept it in good condition and haven’t exceeded the agreed mileage. It’s also known as personal contract hire or PCH. Our guide on car leasing explains more. 

What is the difference between leasing and buying a car? 

If you have a set budget per month and want the reliability of a brand-new car, leasing might be right for you - provided you can afford the monthly payments. 

With leasing you won’t have to worry about unexpected repairs either, because lease cars come with a manufacturer’s warranty. If it’s a brand new car you also won’t have to pay for an MOT. New cars don’t need an MOT test until their third birthday. 

Remember to choose lease contract terms which reflect how you’ll use a lease car before settling on a price with a leasing company. The cost of the monthly payments will be decided based on a number of factors. These include the initial rental amount you can pay upfront as a lump sum, the annual mileage limit you agree to and the contract length. So, it’s important that you can afford to pay the whole lease cost, stick to your agreed mileage and keep the car in good condition. Otherwise, you could end up paying more for late payments, excess mileage charges or damage charges. 

Buying a car often requires a larger upfront payment than leasing, even if you plan to buy a vehicle through PCP (personal contract purchase) or HP (hire purchase) finance. The monthly payments also tend to be more expensive for these finance methods because they go towards the value of the car, rather than its depreciation over the course of your contract – as happens with leasing.  

Once you own the car, you’ll then have to factor in depreciation costs and have enough put aside for any unexpected repairs if the car is out of warranty. 

What are the pros and cons of buying a car? 

Advantages 

• The car is yours: When you buy a car, you own it and only need to fund its running costs. You can make modifications to it too – modifications to a lease car must be reversible 

• You can sell the car: Owning a car means that you can sell it at any point. If you can keep it in excellent condition, find the right buyer and evaluate the car’s cost accurately, you can often recoup a lot of the money you originally spent on it 

• No mileage restrictions: Unlike when you lease a car, you won’t be limited by an annual mileage cap for using your own vehicle. You’re free to drive as many miles as you wish, without being charged any extra 

Disadvantages 

• Depreciation costs: The minute you start driving a car, it begins to lose its value. This means you’ll struggle to recoup most of what you paid for it in the first place. Classic cars are an exception, as these models tend to hold their value more than standard vehicles 

• More problems with age: Cars are a depreciating asset  - they typically experience more problems the older they get. When you buy a car, you’ll have to pay for any unexpected repair work, whether that’s directly through a garage or if you’ve paid for a manufacturer’s warranty 

• Large upfront cost: Even if you’re buying through a form of finance or loan, you’ll often need a larger upfront payment than if you were to lease. This is because the payment goes towards the full value of the car, whereas with leasing the initial rental goes against the vehicle’s total depreciation based on your contract term 

• You’ll have to pay road tax: When you buy a car it’ll be your responsibility to pay tax on it each year. The cost of road tax will vary depending on the CO2 emissions of your model, with cars that emit more CO2 costing more to tax 

• Selling a car can be a hassle: Owning a car means that at some point you’ll probably need to sell it. Regardless of the reason behind selling your car, this process takes time and effort 

What are the pros and cons of leasing a car? 

Advantages 

• Low upfront payment: Most leasing companies allow you to pay as little as one month’s worth of the monthly rental cost up front for the car. However, you can pay more if you want to lower the price of the remaining monthly payments 

• Fixed monthly payments: It’s much easier to predict how much you’re going to spend on your car when you lease it because payments are fixed. As long as you stick to the agreed annual mileage and keep the car in good condition, you won’t be charged any extra at the end 

• A new car every few years: Upgrading to the latest model every few years is expensive. With leasing, you can get behind the wheel of a new model the same day you hand back the keys of your old lease car 

• No hassles of ownership: One of the biggest bugbears of owning a car is that it’s a depreciating asset which becomes more expensive to repair the longer you have it. When you lease a car, the finance provider owns the vehicle and takes responsibility for ownership costs once your agreement is up 

• Value for money: Car leasing includes perks within the cost, such as road tax for the duration of your contract, free delivery to your home and a full manufacturer warranty 

Disadvantages 

• Mileage restrictions: You’ll need to specify how many miles per year you intend to drive at the beginning of a lease agreement. Your total mileage is calculated at the end of your deal when the car is collected, and you’ll be charged a rate per mile for any additional miles over your original limit. A typical deal will let you specify between 8,000 miles and 30,000 miles per year, which is enough for most drivers. If you will drive more or less than this, leasing probably isn’t the best option for you 

• Admin fees: Although not every leasing broker will charge admin fees for a lease agreement, many do. This one-off payment costs around £200 for the broker to process the paperwork for a deal on your behalf 

• Damage charges: It’s your responsibility to keep the car in good condition throughout your agreement. Any damage considered beyond ‘fair wear and tear’ will result in a charge. As long as you’ve stuck to the manufacturer’s service schedule and the car’s condition reflects fair use for the time you’ve had it, you shouldn’t be charged anything extra – but this is a risk 

• Bad credit makes leasing difficult: You’ll need to pass a credit check to prove you can make the monthly payments on your lease before you’re approved. If you don’t have a good credit score with one of the main credit reference agencies (Equifax, Experian and TransUnion) you’ll find approval hard to come by. If you are approved but your credit score is low your initial rental and monthly payments are also likely to be more expensive to reflect the higher risk to the lease provider 

When is it best to buy a car? 

Choosing to buy a car over leasing comes down to personal preference, but there could be a few situations where buying makes more sense. These include: 

• Having a large lump sum to put down: If you know you’ll want to own the car for several years it often works out cheaper to buy it outright. 

• If the car is going to hold its value: This means you’ll lose less in depreciation, so the car will still have value when you come to sell it. 

• You can spot a bargain: If you believe a potential purchase is undervalued, you could buy it and maybe even sell it on at a profit in the future. 

• If you’re a high miler: If you drive more than 30,000 miles a year you might find that leasing a car too expensive and you’d be better off buying a car outright. 

• You want to be the owner: Being the legal owner of a vehicle is important to some drivers. If this is you, you’ll need to buy rather than lease. 

• You have a poor credit score: Leasing can be expensive if you’ve bad credit, so if you are comparatively cash-rich, buying could be preferable. 

When is it best to lease a car? 

If you’re undecided about whether to buy or lease a car, this is when it could be preferable to lease: 

• You want to drive a brand new car: You can quickly be on the road in a new make and model without having to put down thousands to buy it outright. 

• You don’t want concerns over the upkeep: With a full warranty and road tax included you remove much of the admin and hassle associated with owning the vehicle. 

• You don’t want the stress of selling: You simply return the car at the end of the lease term and you won’t have the expense and administration of having to sell it. 

• You want more options: There are a wide range of lease cars to choose from, including more expensive and the latest models which might be out of your budget to purchase. 

Other useful guides  

We have plenty of helpful guides to help you with your car finance decision: 

Everything you need to know about leasing with a bad credit score 

Car leasing for young and new drivers 

How to choose the right lease deal for you 

Compare car leasing with MoneySuperMarket 

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