Do I Lease a Car or Do I Borrow to Buy?
What You Need to Know
- One major advantage of leasing is that, as you can replace your car regularly, you can avoid the costs that come with driving an older car.
- Whilst leasing is cheaper than using a loan to buy a car, in the medium term they work out about the same, and buying is cheaper in the long run.
- When you lease a car the gradual depreciation of its value is taking into account when your monthly payments are calculated.
- When you lease a car you will have some contractual obligations to the leasing company. You may face extra charges of you break these, for example, by racking up excess mileage or ending the lease early.
- If you want to purchase a car using a loan, though you’ll be able to stage your repayments, you’ll still need to make a potentially large down payment straight away.
- The company selling you the car may be able to offer you finance at a better rate than a loan from your bank or building society.
The simple answer is that it depends on your circumstances. You may want the best value in the long term; or you want a car for the smallest monthly payments you can afford; or you want to change your car at regular intervals.
With leasing you can change your car regularly – typically every three years – and avoid the costs that come with driving an older vehicle. But you will never own the car and you will always make monthly payments while your agreement is in place.
In the short term, leasing is cheaper than buying with a loan, in the medium term the two methods are about the same, and in the long term it is cheaper to buy.
- Lease in brief: If a car is worth £20,000 when new, and worth £13,000 when two years old, you will pay the £7,000 difference – plus interest charges and other depreciation mark-ups. You then give the car back. So the monthly charges will be comparatively low.
- Loan purchase in brief: If a car is worth £20,000, then that is what you pay, plus interest rates. So you will pay a far higher sum, but keep the car.
The only money that is required up front is your first payment (usually equal to three monthly payments). Lease payments are cheaper than a loan purchase because the charges are based on different values.
With a lease the car’s final value – what it is worth for re-sale at the end of the agreement – will be taken into account.
You will never actually own the vehicle – the lease company will – which means that if you default on payments you will lose the car, whatever other financial penalties may be imposed.
In effect you hire the vehicle for an agreed period of time and pay a fixed sum for the privilege. The fixed sum will take into account the average mileage you are likely to do. The higher the mileage, the higher the payment, because the more miles on the clock the less the car will be worth when the lease company comes to sell it. And of course if you exceed the agreed mileage, you will face further charges.
The lease can be just for the car, or can include servicing, but again at an increased cost.
Terms usually range from 18 months to five years, and when the lease ends you simply return the car, settle the contract and walk away, with the opportunity to take up a new car.
Don’t be tempted to lease a car with the eventual intention of buying it: that is a very expensive way of doing things.
And watch out for penalty clauses, such as that additional mileage, or ending the lease earlier than you had agreed. There will be a cost.
Buying outright means a major cash outlay, while a loan purchase will allow you to stagger your payments, and keep the car at the end of the term.
But you will have to make a significant down-payment at the outset, and don’t forget that the company selling you the car will be charging uncompetitive interest rates, so it is worth checking how much it will cost you to borrow the total amount from a bank or building society. There are other forms of car finance these days to take into consideration too.
And at the end of the day your car will have gone down in value and may eventually bring you all the additional costs incurred by old vehicles going wrong. But throughout the arrangement things will be clear. You will know how much you are paying, for how long, and when the car becomes your own.