PCP versus leasing: which should you choose?

Most of us like driving new cars, but no one I know enjoys taking the hit on depreciation, maintenance and other costs that come as cars age. So is there a way to reduce your financial exposure to these downsides of car ownership?

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Two increasingly popular choices for drivers looking to get behind the wheel of a new car are personal leasing and Personal Contract Plans (PCP).

Instead of buying the car outright, they effectively enable you to just pay for the depreciation on the car while you’re using it. You can then hand the car back at the end of the contract term without any further obligations.

Both systems normally require a deposit followed by a fixed monthly payment. From a retail customer’s point of view, PCP and personal leasing may seem similar.

Both types of financing usually have strict mileage limits and penalties if these are exceeded. Both require you to hand back the car in good condition or pay for repairs.

But there are some big differences between these two methods. I think it’s important to understand these, if you’re considering using PCP or leasing to finance a new car.

In this post, I’ll explain the difference between leasing and PCP and highlight a third choice — short-term leasing — which may appeal to you if want a new car but don’t want to commit to a deal of one year or more.

PCP versus leasing: the differences

Here’s a summary of the big differences between leasing and PCP:

>>Right to own 

With a PCP deal, you have the right to buy your car for a pre-determined amount at the end of the contract. This is known as the balloon payment, or Guaranteed Minimum Future Value (GFV).

With personal leasing, you must hand the car back at the end of the deal. You don’t have the right to buy.

>>Handing the car back early

With a PCP deal, you can hand the car back after you’ve made 50% of the payments without any further obligation. This is known as Voluntary Termination.

With personal leasing, you cannot usually hand the car back early. Even if you do, you’ll still have to pay a penalty fee and may have to continue making the monthly payments until the end of the lease term.

>>Servicing and road tax

With a PCP deal, you usually have to pay for servicing, maintenance such as tyres and road tax yourself (except for the first year’s tax).

With personal leasing, the lease company will normally pay for everything except insurance and fuel. You will be required to have comprehensive insurance.

PCP versus leasing: which is cheapest?

As a general rule, the monthly payments on a leased car will be lower than with PCP. The main reason for this is that with PCP, you are paying a certain amount extra for the GFV. The dealer or finance company has to let you buy your car for the GFV, even if it’s worth more. A second risk for the finance company is that you may return the car early, without making all of your payments.

With a personal lease, the leasing company knows it will have the car back to sell at the end of the term. And it knows you will (usually) have to make all of the payments on the lease. So it doesn’t need to leave a margin of safety. The expected residual value can be calculated more precisely, and you will often be able to enjoy lower monthly payments.

Which should I choose?

The statistics suggest that most people who opt for PCP don’t choose to buy the car at the end of the contract term. According to figures published by the Finance and Leasing Association, four out of five people on PCP plans hand back the car at the end of the finance term.

If you don’t think you’re likely to want to keep your car at the end of its PCP term, then leasing might be cheaper. It’s certainly worth getting some quotes and considering your options.

Can I get PCP or a lease for less than one year?

PCP and lease plans normally run for between one and three years. If you don’t want to commit to such a long term, then short-term leasing (also known as long-term hire) might be an option.

There are a number of companies in the market which offer short-term leasing with fixed monthly payments and no deposit. For example, York-based Switch Car Leasing (which is part of the much larger Autohorn leasing group) offers a so-called Genius Plan where the minimum commitment is just 28 days.

Most people don’t want to change their car this often. But if you’re just starting out in business, are in between company cars, or are in a similar state of change, this may be worth considering. Although the monthly payments are higher than they would be with a long-term lease, it’s generally cheaper than daily car rental, and you aren’t committed for more than a month ahead.

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