Hire purchase vs leasing a car
Hire purchase and leasing are different types of car finance. Understand which might better suit your needs
Key takeaways
Hire purchase is ideal if you want to own a car or prefer used cars
Leasing is suitable for driving a new car without ownership concerns
Remember to assess your specific needs and preferences when choosing between HP and leasing
When it comes to financing a car – whether new or used – there are plenty of available options. But which suits you best will depend on a range of factors and differs from person to person.
Start by considering your personal finances and requirements, the make and model of the car you’re looking to buy, and your goal at the end of the finance agreement.
What's the difference between hire purchase and leasing?
The key difference between a hire purchase (HP) contract and leasing a car is that you will own your car at the end of an HP contract. In contrast, when you lease a car, you’ll hand the car back once the contract term is up.
What are the other differences between leasing and HP?
Our table below shows the other differences between taking out a car on hire purchase and car finance. (The information assumes a new car is being financed because car leasing is typically only available for new cars):
| Leasing | HP |
|---|---|---|
Is an upfront payment required? | Yes - you will need to pay for a period of the rental upfront | You may need to make a deposit payment either in cash or via trade-in of an existing vehicle (or both) - but not always |
Will I own the car at the end? | No – the car will be handed back to the leasing company | Yes – once all payments are made you will own the car |
Can I modify the car? | No | No – not during the term of the agreement, but once you’ve made all your repayments you will have full ownership and are free to modify the car |
Can I sell the car? | No | No – not during the term of the agreement, but once you’ve made all your repayments you are free to sell the car |
What happens if I fall behind on my monthly payments? | Your car will be at risk of repossession | Your car will be at risk of repossession, however depending on how far through the agreement you are, you may have some legal protection |
Can I hand the car back early? | Yes - you can typically hand the car back before the end of the agreement, but there will likely be fees associated with this. Check with the leasing company to understand these before you sign up | Once you have paid back half of the total amount payable on your agreement, you will be able to hand the car back to the finance company. This is called ‘voluntary termination’ |
Can I settle the agreement early? | Not relevant - with car leasing there is no option to own the car | Yes – if you want to pay off the remaining balance early and take ownership of the car you can request a ‘settlement figure’ from the finance company. Providing you pay the required amount within the time period stated by the finance company, you will then own the car |
Am I responsible for the maintenance of the car? | Yes – although you can often purchase additional maintenance packages | Yes - usually |
How does hire purchase work?
With a hire purchase agreement you don't pay the full cost of the car upfront.
Instead, you sign a contract where you’ll make a number of regular payments and will own the vehicle when you’ve paid the last instalment.
Here’s what to expect when you take out a hire purchase contract:
Pay an upfront deposit (which could be cash, trade-in of an existing vehicle or both)
Make fixed monthly payments for the term or period of the agreement (typically three, four or five years)
Once the contract term is over, you’ll own the car outright
Important to remember: The finance company has security in the form of the car, so if you don't keep up with repayments, they can take it away.
How does car leasing work?
Unlike hire purchase, with leasing you will never own the car, but effectively rent it and return it to the leasing company at the end of the contract.
Here are the main steps of leasing a car:
You choose the car you want to drive
You agree a rental period (such as three years for example) and pay an initial upfront payment to the leasing company
You then make fixed monthly payments for the period of the agreement
At the end of the leasing term, you return the car back to the car financing company
Important to remember: Always read the terms and conditions as factors such as mileage, upkeep, insurance and whether you can drive the car abroad can vary between leasing companies.
Is leasing cheaper than hire purchase?
Whether leasing or hire purchase works out as the cheapest option will depend on the car and the finance deal you can get.
Because leased cars are usually brand new, leasing can be a cheaper way to drive the latest make and model, compared to buying through an HP plan or taking out a personal loan.
Our example below breaks down the cost of financing a car through leasing and HP.
Example comparison (for a consumer with excellent credit score):
Car: Volkswagen GOLF HATCHBACK 1.5 TSI 150 R Line 5dr
Annual Mileage: 10,000 miles
Term: 3 years
Retail price: £27,370
| Car Leasing | HP |
|---|---|---|
Up front payment | £2,646.00 (based on deal with 9 month ‘initial rental’) | Upfront deposit £1,000 |
Total amount of borrowing | N/A (Consumer is not taking out a credit agreement) | £8,000 |
Typical APR | N/A (Consumer is not taking out a credit agreement) | 14.9% |
Fixed monthly payments | 35 x £237.86 | Monthly repayments £186 |
Fees | £294 (processing fee) | £10 (option to purchase fee) |
Total cost | £13,229.56 | £11,161 |
Sources: Car leasing quote – Moneyshake. Car RRP – volkswagen.co.uk.
HP deal: (APR, monthly payment, fees) Motiv Finance.
*Data accurate as of November 2023
What are the pros and cons of leasing?
Advantages of car leasing:
Can offer low monthly payments on new cars
The monthly payment is fixed for the duration of the contract
Often there is the option to add on a maintenance package (at extra cost)
Disadvantages of car leasing:
Usually only available on new cars so you’ll have less choice about what you buy and new cars are more expensive
Handing back the car early (called early termination) will often incur fees
You will not own the vehicle and must return it at the end of the term
When you return the car, penalties may be incurred if you go over your agreed mileage or if there is any damage to the vehicle beyond normal wear and tear
What are the pros and cons of hire purchase?
Advantages of hire purchase:
It’s a simple product that’s easy to understand
The monthly payment is fixed for the duration of the contract
Available on new and used cars
Once the agreement is completed you own the car
Disadvantages of hire purchase:
Only usually available if the car is being sold by a dealership so you may have less choice of vehicle to buy
Monthly payments can be high - especially for new cars
You won’t be able to sell or modify the car during the term of the agreement
Your hire purchase contract is for the cost of the new car, but by the time you own it outright depreciation will have lowered its value
Which option is right for me?
If you’re either looking to own a car or are interested in a used car, then hire purchase will suit your needs better than leasing.
On the other hand, a lease could be the right option if you want to drive a new car and you don’t care about having to hand it back at the end of the deal.
But if you’re struggling to meet your budget requirements with HP or you want the option to return the car at the end of the deal and trade in for a new car, personal contract purchase (PCP) may be a better choice for you. To see how much a deal may cost you, visit our car finance calculator.
Alternative ways to finance a car
HP and car leasing are not the only ways to fund the purchase of your new car. There are a range of other alternatives, including personal contract plans (known as PCPs), personal loans or bank loans – and even credit cards in some cases:
Personal contract purchase
Personal contract purchase (PCP) is another popular finance option for both used and new cars. It works in a similar way to hire purchase, but at the end of the contract you have the option to pay a larger and final balloon payment to keep the car. If you’re attracted to the lower monthly payments of leasing but looking to either buy a used car or have the option to own the car at the end, then a PCP could be for you.
Personal loan
Also known as bank loans, personal loans can be used to purchase a new or used car. They offer additional flexibility because the money goes directly into your bank account leaving you free to buy whatever car you wish, including those for sale with private sellers. Car loans can offer very low interest rates, but typically those rates are only available to applicants with excellent credit scores. Find out more about your credit score with our free credit score service.
Credit card
While you can use a credit card to buy a car, the limit of your credit card may be lower than the cost of the vehicle. There may also be additional fees for this type of high value transaction. It's important to find a credit card with low interest and high credit limits for this type of purchase. This minimises borrowing costs while covering the price of the car. A rewards credit card is a good option, as it allows you to earn points or cashback.
Other helpful car finance guides
We have lots of useful information about your car finance options in our guides:
Compare car finance deals
If you’re interested in car leasing we can help you compare deals with our car leasing service powered by specialist leasing provider Moneyshake.
Alternatively, you can compare car finance deals with our partner Motiv. It’s an online service that allows you to see if you’re eligible for HP and PCP deals and the rates you’ll pay.
It only takes a few minutes to enter your details and compare offers, it is free and searching for a deal won’t harm your credit score.
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Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
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Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
