There are a number of benefits to leasing a car (personal contract hire), particularly if you want to drive the latest models while maximising your spending power. However, it's important to be aware of potential pitfalls, too. Here we examine whether it is better to lease or buy a car.

There is a certain joy in buying something brand new - especially if that something is a shiny, just-off-the-court Range Rover or Mercedes.

The look, feel and smell of the interior, the flawless paintwork, the cutting-edge gadgetry - and, just possibly, the looks of envy from your neighbours and coworkers - make for a tantalising prospect.

But new cars are expensive - and not everyone has enough for a new motor in their bank account or under their mattress. That's where leasing comes in, known more technically as personal contract hire (PCH) - which places new cars within the grasp of millions.

 

Leasing: how does it work?

You get to take home a brand new car in exchange for agreeing to pay a monthly fee. This is calculated by working out the likely depreciation of the model you want - deduced from the residual value and how many miles you're likely to drive each year. This number is then divided by the months in your agreement. The leasing firm then adds some interest - resulting in your monthly fee.

 

Does personal contract hire (PCH) make financial sense?

If you want to drive a new, high-end car, and don’t plan to drive too much, then personal contract hire could make a lot of sense.

Example: Range Rover Evoque - 2.0 D150 5dr 2WD

Based on recent leasing costs, a Range Rover Evoque 2.0 D150 5dr 2WD might be available to lease for 48 months at £306 a month, based on 5,000 miles a year and with an initial rental (deposit) of £2,755.

In this example, your average daily mileage should not exceed 13 miles - so such a deal would be unsuitable for those planning regular long-distance trips.

On the other hand, for a highly desirable vehicle with a list price of £31,000, this arrangement may seem like a good deal.

 

Is PCH only for expensive cars?

Not at all - personal contract hire can make sense for budget new cars, too. With a lower book price, depreciation is minimal. This means you might be able to drive a new car for two years at around the quarter of the vehicle's list price.

After the lease is up, you will have to return the car. But on the upside, you can lease another brand new car afterwards - which is great if you enjoy driving and owning the latest models.

 

Ownership of the car

As the word 'lease' suggests - you do not own the vehicle outright - it belongs to the leasing firm. If you wanted to own the car fully, you would need to choose a financing arrangement. You are essentially borrowing the car.

So should you buy or lease a car?

 

Benefits of car leasing
  • You get to drive a car hot off the production lines.
  • Because the car is new, you'll have few of the maintenance costs associated with older cars.
  • If you like to drive the latest models, and don’t drive too far or too often, leasing could make sense.
  • You can often pay a little extra to cover maintenance costs, giving you peace of mind.
  • You'll know exactly how much the car will cost over the period of the lease.
  • Maximises your spending power.

 

Drawbacks of car leasing
  • After the lease term is up, you'll have to return the car.
  • You'll have no asset to sell at the end of the lease.
  • You'll be tied into the lease.
  • If you fail to make the agreed payments, your vehicle may be repossessed. However, this is a last resort, and you may be able to come to a temporary arrangement while your financial situation improves.
  • You could be charged an extra fee if you exceed the agreed mileage.

 

Compared to buying a car...

If you buy a car outright - or set up a finance deal - you’ll own the car forever or until you decide to sell it. The full extent of the car’s depreciation will then be realised - until this point, it might be considered a ‘hidden’ cost. But buying has one distinct advantage - you’ll always own a stake in your car; whereas if you lease, you’ll have nothing at the end of the agreement.

 

More information on personal contract hire (PCH)

For more guidance of car leasing - and to become aware of the potential pitfalls - visit the British Vehicle Rental and Leasing Association (BVRLA) website: https://www.bvrla.co.uk/