Skip to content

Hire purchase or leasing?

Hire purchase or leasing: A complete guide

published: 09 November 2022

Hire purchase and leasing are different types of car finance. Understand which might better suit your needs

When it comes to financing a car – whether new or used - there are plenty of available options. But which route suits you best will depend on a range of factors – and it’ll differ from person to person.  

Find out which route will work for you by considering your personal situation, including details of the car you’re looking to buy, your goal at the end of the finance agreement (do you want to own the vehicle or trade it in for example), and your financial status. 

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 once the contract term is up you’ll hand the car back.  

Man and woman in car abroad

How does hire purchase work?


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: With HP 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?

Here are the main steps of leasinga 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 

What are the other differences between leasing and HP?

The main difference between hire purchase and car leasing is that at the end of the HP term – you own the car.  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

Is leasing cheaper than hire purchase?

Whether leasing or hire purchase works out 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 drivethe 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

£2,140.74

 (based on deal with 9 month ‘initial rental’)

£2,737

(assumes a 10% cash deposit paid by consumer)

Total amount of borrowing

N/A

(Consumer is not taking out a credit agreement)

£24,633

Typical APR 

N/A

(Consumer is not taking out a credit agreement)

7.9%

 Fixed motnhly payments

35 x £237.86

36 * £767.68

Fees

£360 (processing fee)

£10 (option to purchase fee)

Total cost

£10,825.84

£30,373.62

Sources: Car leasing quote – Moneyshake. Car RRP – volkswagen.co.uk. 

HP deal: (APR, monthly payment, fees) Motiv Finance.

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 

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 think you may want the option to the return the car at the end of the deal and trade in for a new car, PCP may be a better choice for you. 

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 (PCP) is another popular finance option for both used and new cars. 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 loans – also known as bank loans – can be used to purchase a new or used car. They offer additional flexibility in that you get the cash directly into your bank account and are 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 monitor service. 

Other helpful car finance guides

We have lots of useful information about your car finance options in our guides: 

Buying a used car

Car finance versus personal loans

Hire purchase versus personal contract plans

0% car finance

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.

Compare with our partner, Motiv
Compare car finance