Should I lease or buy a car?
Leasing a car can be a flexible way to drive a car and upgrade to different models every few years. However, you won’t ever be the owner of the car, unlike if you buy it outright. Read on to see if leasing or buying a car is most suitable for you.
Deciding whether to lease or buy a car can be difficult. Each option has its advantages, but ultimately the decision depends on a few factors, including your budget, whether you want to own the car outright, and how often you’ll want to change vehicles.
Here we look at the pros and cons of leasing versus buying, and some of the reasons why you might consider either option.
What is leasing?
Leasing a car is the same as leasing, or renting, anything. You pay a deposit and then a monthly fee to use the car. At the end of the contract you hand it back and walk away. Unlike car finance, there is no option to own the car.
The benefit of leasing is that it can be a more affordable way to drive a brand-new car, and its flexibility means you can change cars every few years.
You also don’t need to worry about the depreciation (the value of the car reducing over time) of the car as you’ll never own it, and you’ll usually get road tax or breakdown cover included in the cost.
The lease will come with mileage limits and you will need to return the car in good condition at the end of the lease, or pay further charges.
» MORE: Car leasing explained
What are the different ways of buying a car?
Before you make a decision on leasing, it’s worth exploring the different ways to finance a new or used car.
Cash is the simplest way to pay for a new car, as well as most likely the cheapest way as you won’t pay any interest.
If you don’t have the cash to pay for a car upfront, or you’d prefer to do it in monthly instalments, a finance deal could be worth considering. There are several different types of car finance and most require an initial deposit, then monthly repayments over a set period.
Using a credit card to pay for all, or part, of a new car is an option if you don’t have the cash to pay for it upfront. You’ll also get extra protection under the Section 75 Consumer Credit Act if you use a credit card for any part of the payment, as long as the value of the car is between £100 and £30,000. This means the credit card provider and the car dealer become jointly liable if something goes wrong. However, if you don’t keep up with your monthly credit card repayments, you may pay extra fees, higher interest rates and damage your credit rating.
Using a personal loan means you can own the car outright, but you’ll then need to make the repayments on the loan for a set period of time. This could be a cost-effective way to borrow money to buy a car, if you can find a loan with a competitive interest rate. The rate you get will depend on your credit score.
What are the differences between buying and leasing a car?
Here we look at the main differences between buying and leasing a car.
|Leasing a car||Buying a car|
|You’ll never own the car and you’ll have to hand it back at the end of the contract.||You’ll own the car, straight away if you pay upfront in cash or with a loan, or you can choose to own your car after a finance contract ends.|
|You may need to pay at least three months’ worth of payments upfront.||There are lots of finance options to consider but most will allow you to put down a relatively small deposit.|
|Road tax, servicing and breakdown cover may be included in the cost.||You’ll need to arrange separate road tax and breakdown cover.|
|You don’t need to worry about depreciation.||When you own a car, you’ll have to think about depreciation. Brand new cars can lose up to 40% of their value in one year, according to the AA.|
|The lease will come with certain terms, such as a cap on mileage, and you’ll need to return the car in good condition or face extra charges.||You can get unlimited mileage and you are free to modify the car (unless you are on a finance agreement).|
|It’s difficult to end a lease early, and even if you do end it, you may still need to pay off the total cost of the lease in full.||If you buy a car on finance, you can cancel the finance agreement if you meet certain conditions. This is called voluntary termination.|
Is it cheaper to lease or buy a car?
Any money you pay for leasing the car stays with the provider. You won’t get any return from your payments aside from the use of the car for the agreed term, whereas, if you owned the car, you could choose to sell it to access its value and get some money back.
However, if you lease a car instead of owning it, you don’t have to worry about depreciation as the car is never yours. Therefore when weighing up the cost of both, you need to decide if the money you’ve spent during the term of the lease is less than the amount of money you’d lose through a car’s depreciation.
To do this, you can find out the total cost of your lease, then work out if it is higher or lower than the money you would lose if you bought and sold the car over the same period.
For example, if a car costs £15,000 and after three years it is worth £7,000, it will have lost £8,000 in value. So, if a lease on the same car cost less than £8,000 overall, it would be cheaper than buying.
However, this issue would only matter if you bought your car and then wanted to sell it soon after. If you want to carry on driving your car for several more years, depreciation would be less of an issue, and buying the car is likely to be cheaper than continually paying a lease.
As well as cost, the question of whether you should lease or buy a car will depend on other factors like:
- The type and age of the car. If you want a new car, leasing may end up cheaper overall. However, if you are happy with a cheaper, used car, then buying may make more sense.
- How much you’ll be using your car. Higher mileage limits will push up the cost of your lease payments.
- How often you’ll want to change your car. Leasing could be cheaper if you want to upgrade your car regularly.
- Your own financial circumstances, including your credit score and how much you can afford to pay for a deposit and monthly repayments.
- Whether you want to own the car.
Image source: Getty Images
Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more