Car Leasing Vs PCP

Leasing & personal contract purchase (PCP) are both car finance agreements which let you drive your choice of vehicle for a set time while paying monthly rentals or payments. However, they are separate contracts with their own features which could affect your decision.

Learn the 10 differences between car leasing & PCP below to see which is the best option for you.

1. Owning The Car

Car ownership is the main difference between leasing & PCP. With a lease (specifically Personal Contract Hire, you simply hand back the car at the end of the agreement. The vehicle is owned by the finance company & you won't have to worry about buying it at the end of your contract.

Alternatively, PCP finance gives you the option to purchase the car at the end of the contract & become the legal owner. If you wish to buy the vehicle, however, you will need to pay the remaining debt on the agreement, which is often called a "balloon payment" or the Guaranteed Minimum Future Value (GMFV).

2. Paying For What You Drive Vs The Full Car

Leasing is essentially another word for long-term renting. Your monthly rental costs are calculated based on how you drive the car – the greater your mileage, the higher your deal price. This is because a new car will depreciate the more you drive it, meaning you can get a cheaper deal if you drive fewer miles.

With PCP finance, your monthly payments are worked out differently. You borrow an amount equal to the full value of the car & pay interest throughout. This is because PCP is intended for customers who might want to buy the vehicle when the agreement finishes and often works out more expensive in the long term.

3. Leasing Is Cheaper If You Don't Want To Buy

Lease deals are usually cheaper than PCP contracts because you only pay for part of the car's total value, rather than the full amount. Even if you choose a used car through PCP, you still pay for its full value, which is why a lease is better if you don't want to buy or want to upgrade every few years.

We have very strong relationships with car manufacturers & dealers, which lets us guarantee lower prices & give you better deals.

4. New & Used Cars

Vanarama's lease cars are always brand-new & sent straight from the dealership to you. The only mileage on the odometer will be from when it's driven & delivered to you (which won't be included in your contract).

PCP offers both new & used cars. A second-hand car will be cheaper monthly but doesn't provide the same reliability & protection as a new vehicle.

5. Warranty & Breakdown Cover

Since lease cars are new, your deal will come with a manufacturer's warranty, which usually lasts 3 years. If your car experiences a fault, most mechanical issues will be included in the warranty & can be repaired at the dealership for free.

If you choose a used car through PCP, you won't be provided the same level of protection that you get with a new vehicle. Used cars don't come with the manufacturer's warranty or breakdown cover. You may find some PCP companies offer a 30-day warranty so you will be covered for only a month after your agreement begins. If the car is new, however, it will usually be covered by a manufacturer’s warranty.

6. Maintenance

Most leasing companies offer a maintenance package, which covers you for routine servicing, repairs & replacements such as tyres. It can be added to your monthly payments, giving you one hassle-free, fixed cost for your car & its maintenance.

You may not be able to take out a maintenance package with a PCP contract. This means you will pay separately for mechanical faults & repairs, plus MOTs & servicing.

7. VED Tax

You will receive at least one year's worth of VED (or road tax) included in a lease contract. Sometimes it's included for the entire length of your deal.

With PCP, you will need to arrange & pay for road tax yourself.

8. Ending The Contract Early

It's usually harder & more expensive to end a lease contract early, because your agreement is calculated on the basis that you're only borrowing the car for a set time period.

If your circumstances have changed & you can no longer pay your monthly instalments, contact the finance company who will provide you with a termination fee. This is usually 50% of the total remaining payments left on your lease contract term.

It can be easier to end a PCP agreement early. After you have paid 50% of the full contract, you are legally allowed to cancel through voluntary termination. If you paid more than 50%, you can still cancel but won't be entitled to a refund.

If you haven't paid 50% yet, the car finance company will offer you an early settlement figure – but this involves paying the full remaining balance of your entire agreement outright.

9. Final Rental/Payment

After making your final rental payment on a lease, you're free to take up a new deal or find another car elsewhere. Providing you have kept the car in good condition & haven't exceeded your mileage limit, you won't face any other costs.

At the end of a PCP deal, if you want to buy the car you will make one final payment. This is referred to as the balloon payment & is the total remaining debt outstanding. It is calculated based on the estimated value of the car at the end of the deal.

10. Depreciation Risk

Because you won't own the car when a lease ends, you don't need to worry about depreciation – it's already factored into your monthly rentals. While you won't have any equity when the deal ends, you also don't need to worry about the depreciation risk.

A PCP deal is different. The balloon payment required to buy the car is estimated at the start of your contract, but if your car depreciates significantly more than expected, it will be worth less than the original valuation. However, you will still have to pay the car finance company the amount you agreed on.

For example, if you owe £10,000 at the end of the agreement but your car's only worth £7,000, you'll be out of pocket by £3,000. This is known as negative equity.

If your vehicle is worth more at the end of a PCP contract you will be in positive equity.