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Hire purchase or leasing?

How to find out which is best for you

Hire purchase and leasing are different ways to fund a car purchase. Understand which might better suit your needs

By Lucy Hancock

Published: 22 September 2021

Man and woman in car abroad

Compare with our partner, Motiv

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 are the main differences between hire purchase and leasing?

Hire purchase (HP) is a common way to finance a new or used car purchase. You may pay an upfront deposit (which could be cash, trade-in of an existing vehicle or both) and then you’ll make fixed monthly payments for the term or period of the agreement (typically three, four or five years). 

At the end of the term you’ll own the car outright. 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. 

Leasing (sometimes referred to as personal contract hire or PCH) is an option to consider if you’re interested in driving a brand new car (it’s not typically an option for used cars) and have no interest in owning the vehicle at the end. It’s essentially a long-term rental and works as follows:

  • You choose the car you want to drive

  • You agree a rental period (such as three years for example) and an initial upfront payment with the leasing company

  • You pay a fixed monthly payment for the period of the agreement

 

At the end of the leasing term you hand the car back to the leasing company at which point you can sign up for a new car or walk away. 

One of the main differences between HP and Leasing is that with HP you’ll own the car at the end of the deal. This is not the case with leasing. For HP this means there is added value because there is a chance to recoup some of what you’ve spent on buying the car – for example when you choose to trade it in or sell it in the future.

But there are many other differences – pros and cons - to consider, some of which are outlined in the table here (The information assumes a new car is being purchased 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

 

Yes – usually you will need to make a deposit payment either in cash or via trade-in of an existing vehicle (or both)

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

Which is cheaper leasing or hire purchase?

Whether leasing or hire purchase works out the cheapest option will depend on the car and the finance deal you can secure. But for brand new cars, leasing will typically work out the cheaper way to drive a new model. 

Bear in mind, however, that with hire purchase the cost is likely to be higher than with leasing because you’ll own the car outright at the end of the deal. In contrast, with leasing you’ll have to hand the car back.

Often hire purchase is used to finance used cars – and in this case the cost will be far cheaper overall. Leasing, in contrast, is typically for brand new models, not used cars.

In the example below leasing is by far the cheaper way to drive the new car over a three-year term. But consumers picking this route will have to hand the car back at the end of the deal. Only with the HP finance will they end up owning the car at the end – and this has high value as you should be able to recoup some of your money if you need to trade in or want to sell, for example.

 

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

There’s lots more 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.

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.