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The best consumer advice to save you money and make your driving life easier WHAT ARE THE MAIN ARGUMENTS FOR AND AGAINST LEASING MY NEXT CAR?
QI am thinking of trading in my existing car and going for a lease instead of buying another. What are the main positives and negatives of leasing versus purchase? SH
A
I’m going to answer your question with another question: are you planning to buy the car outright, or using finance?
If you’re buying outright, the biggest advantage is that you own the car, so you can do what you like with it. The downside, however, is that you’re taking a gamble on its future value, as you’ve no idea how much you’ll be able to sell it for when the time comes.
Leasing a car, by contrast, gives you a fixed monthly amount you’ll pay, which factors in the car’s depreciation. This way, you won’t face any nasty surprises when the time comes to change. Of course, you’ll usually end up paying more over the course of a lease deal than you will in depreciation. In effect, what you’re paying for here is certainty.
However, most new car buyers – 91 per cent – go for finance instead. In that case, the differences between buying and leasing are more subtle, but no less important to be aware of.
On the face of it, both personal contract purchase (PCP) and hire purchase (HP) finance schemes can seem very similar to a lease: there’s an initial down-payment, followed by several monthly payments over the course of a fixed contract term.
With HP, these monthlies make up the remainder of the value of the car, so that once you’ve made the last payment, you automatically take ownership. By contrast, PCP requires you to pay a final lump sum at the end of the contract term if you want to own the car, in exchange for lower monthly payments.
Finance and lease companies all work out the absolute minimum they think the car will be worth at the end of the contract – a figure called the guaranteed minimum future value (GMFV) – and your payments are based on this.
Of course, this is an absolute minimum, so the likelihood is your car will be worth more than this figure when the contract ends. The difference between the amount you’ve paid into it and the amount it’s actually worth is your equity in the car, and this is where finance schemes come into their own, because this equity can be put towards your next car.
The catch, of course, is that to build up this equity you’re essentially overpaying. And because you can usually only use it to spend on a car from the same manufacturer, you might end up losing that money if you want to buy elsewhere next time around.
So what about leasing? It is growing in popularity because the downpayments and monthly costs are usually lower than with finance. That can make it a very cost-effective way to get yourself behind the wheel of a new car.
But there are downsides here, too. Firstly, you don’t have the opportunity to use any equity you might build up in the car. Once your money’s gone, it’s gone.
Secondly, if you hit hard times partway through the deal and need to cancel it, you might face fairly hefty financial penalties. By contrast, with a PCP or HP, if you’ve already paid 50 per cent of the total amount owed to the finance company (or if you haven’t and are willing to make up the shortfall) you can return the car early with no extra charges.
Finally, of course, you don’t get the chance to own the car with a lease deal – so even if you don’t want to, you have to give it back at the end of the term.
Therefore leasing is usually a better bet if you’re confident your circumstances won’t change in the next few years and you know you won’t want to keep your car at the end of the term. Finance is a better bet if you want flexibility and are prepared to pay a little extra for it.
And, if you can do it, buying outright makes the most sense because it’s unlikely you’ll ever pay as much in depreciation as you will in interest.