There are many roads to car ownership but how do you know which one is best for you? Car financing, leasing and buying outright all have their advantages and disadvantages and these depend on your own personal situation. Even with all of the information in front of you, it can still be tricky to make the final decision. We’ll aim to make things easier by breaking down the pros and cons of each method.
Car Leasing PCH
Personal Contract Hire (PCH) or car leasing is somewhat similar to renting. You never actually own the car and instead you pay a monthly fee to drive it over a set period of time. Once this time is over, you have the option to buy the car by paying whatever is left of the total value. But you don’t have to, you can just return the car and start the whole process again.
What attracts most people to leasing is that you’re always driving around in a brand new car. After your term is over (often 3 or 4 years), you swap your car in for the latest and greatest model. The advantage over buying a car outright is obvious – buying a new BMW X5 might set you back £60k but PCH means you can get the same great SUV for a smaller fee each month. On the other hand, the monthly payments for a lease are likely to be higher than finance payments. It just depends on your monthly budget and what kind of car you’d like to drive.
Another great advantage of leasing is that you don’t have to worry about the car depreciating in value. You’re only renting it for 3 years and then the dealer will take it off your hands. Because you aren’t laying down a huge one-off fee, like you would be doing when buying a car outright, it means you’ve got some cash free to invest elsewhere or save up for a rainy day. Some leasing companies even pay your road tax and any faults with the car will be resolved for you.
There are, of course, a few disadvantages and one of these is related to ownership. With leasing, you are paying for something that isn’t yours. You could potentially be paying a monthly fee for the rest of your life or for as long as you plan to drive. If you simply buy the car, you never have to worry about that.
Perhaps the main disadvantage is interest. The monthly interest you pay on your lease means that the overall price you pay for the car is significantly higher than the vehicle’s RRP. You’ll also need to be careful with a lease, as you will with financing – make sure you can afford the deal you’re entering in to. If you miss your monthly payments, it’ll have a negative impact on your credit rating and you could end up with debt you can’t escape from.
Car Financing PCP
Car financing, also known as Personal Contract Purchase (PCP), is somewhat similar to leasing. You pay a deposit and monthly fee, and then you pay interest on that fee. The difference is that you are paying towards ownership of the car rather than renting it. The advantage over a one-off purchase is that it opens the door to driving for a huge number of people who could never afford to buy outright. The monthly payments are much, much more manageable. The disadvantage – the total fee you pay for a car at the end of your finance term is a lot higher than it’s RRP. As with leasing, you need to be sure you can afford the monthly payments, or it could lead to you having a bad credit score.
Despite these cons, car financing is often the most sensible route. It’s a flexible process with options to suit a variety of financial situations. Poor credit car finance specialists can offer a car that you probably couldn’t afford otherwise. As with leasing, you have spare cash to use for day-to-day living or even invest in other projects. At the end of the term, the car will be yours and you may even have improved your credit score in the process.
Having enough cash to buy a car outright is a fantastic situation to be in. The whole process is smooth and simple. Once it’s done, it’s done. The car is yours and you never have to worry about monthly payments or interest. The total price you pay for the car is a lot lower than with financing or leasing. If you ever find yourself in financial difficulty, you could always sell the car.
The biggest disadvantage is the value depreciation. Your investment loses value each year and after 3 years, could be as high as 60% lower than what you paid. You can offset this by trading your cars in for new ones at regular intervals, but you’ll still lose something in the process. This is the case with used cars, as well as new ones, although depreciation in value slows down after 4 years. Whichever car you do buy is dictated by your current pot of money – if you lease or finance, you’ll likely be able to get a much better car.
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