What's The Difference Between Leasing and Hire Purchase?
Are you in the market for a new car? Then there are a bunch of questions you’re going to want to ask yourself. And as much as deciding between red or blue is a big decision, so is choosing how you’re going to fund your purchase.
The decision between hire purchase and leasing can leave you rather confused trying to find the differences.
Luckily, we’ve put together a guide to explore the differences between leasing and hire purchase so you can breathe a sigh of relief.
The Decision Between Leasing or Hire Purchase
While there are numerous different types of car financing options to choose from, most find themselves debating between leasing and hire purchase.
Trying to work out the differences between leasing and hire purchase can sometimes feel like you’re playing spot the difference with the same picture.
Fortunately, there are some pretty key differences between leasing and hire purchase to help distinguish between the two.
We’re going to break down hire purchase and car leasing to find out just what they’re all about to help you make a more informed decision.
Why Would You Need Car Finance?
When looking into how you’re going to gather the funds for your new purchase, like the majority of people you may not have the money to buy your car outright. Thankfully, car finance has your back.
Lack of Funds
The main reason you’d look into car finance is if you don’t have the funds to either, a) buy the car in full, or b) buy the car you want. Car finance can provide a flexible, structured payment plan to spread out the cost of your new set of wheels.
Improve your Credit Score
The other reason for those investing in boosting their credit score, particularly if you’re looking to improve your credit score from poor. Car finance can provide the perfect means to boost your credit score over the duration of your contract.
Worried About Depreciation?
Car finance can be a great way to avoid facing depreciation. Having nearly half the value of your car lost within the first few years is understandably something that doesn’t entice people into buying.
Hire Purchase
What is Hire Purchase?
Hire purchase, also known as an installment plan is just as the name suggests - the value of the car (plus interest) is repaid through instalments.
Hire purchase is much like that of a personal car loan with a very notable twist - you don’t own the car until all payments have been made. This is because the loan is secured against the car, while a personal loan isn’t.
In most situations, a deposit is required which is roughly equivalent to 10% or more of the cost of the vehicle. Once this has been paid, the rest of the value is paid off in a period of 1-5 years. The interest can vary depending on your credit score and whether you’re looking for a brand new car or a pre-owned car.
Options at the End of the Contract
It’s important that you have read the terms and conditions in full before entering into a hire purchase agreement. There are certain conditions that you might not have been aware of, such as the ‘option to purchase’ which is a final payment that is required to own the vehicle at the end of the contract, typically between £100 and £200.
This should be found in the HP agreement you sign at the start, but if you can’t find this it’s best to ask as the charge can vary.
Tax, Insurance and Maintenance
Tax and maintenance are not included in an HP agreement, this can mean these costs are additional to the monthly payments. Insurance should be sought out separately, usually requiring a fully comprehensive insurance policy.
If the contract has been taken up through a dealership, MOTs and servicing are usually heavily advised to be taken up by the dealership themselves. The cost of this can be much higher than traditional MOT and servicing garages.
Benefits of Hire Purchase
- Spread the cost of the purchase of your car over several years
- With hire purchase, unlike leasing, after the final payment, you will own the car
- Fairly simple car finance option
- The interest and cost of the payments are fixed throughout your contract helping you to budget accordingly
- Can improve your credit score if payments are made on time
- Unlike saving up to buy the car outright, hire purchase provides a means of acquiring the vehicle straight away
- Once half of the payments have been made there is usually an option to give back the car providing flexibility
Drawbacks of Hire Purchase
- The value of your car will depreciate over time and be worth less by the time your contract is over
- Can damage your credit score if payments are not made and the car will be taken off you
- The duration of hire purchase contracts can be quite lengthy, lasting on average between 3 and 5 years
- Gap insurance is heavily advised in case your vehicle is stolen/destroyed, however, will add to the total cost of the payments
- Makes for a more expensive option for a short term contract
- Final payment is required at the end called the ‘option to purchase’
- Payments are usually higher than PCP and leasing
Car Leasing
What is Car Leasing?
Car leasing is designed to be a simple, quick and affordable way to drive the car you want. Not that we’re biased… but car leasing has tremendous benefits outside of the obvious, spreading the cost, making driving more affordable.
Easy and straightforward, car leasing is set up with convenience at the core - simply make an initial deposit (usually between one and several months payments) and then continue making payments across a fixed period of time.
The contract itself is quite flexible, car leasing is available in 12, 24, 36 and 48 month periods. However, the standard and more common are 24 and 48-month contracts.
Options at the End of the Contract
Since car leasing is essentially renting the vehicle, much like a rented property you simply hand back the keys and walk away. No extortionate final charges, no hidden clauses - leaving you to look for your next car hassle-free.
With Pendle Leasing, you don’t even have to drive your car back to the lot, for a small fee we will deliver and collect your vehicle.
Tax, Maintenance and Insurance
Fortunately, when comparing leasing to hire purchase, leasing is more equipped to provide a seamless experience. Packed with pretty much everything you’d need throughout your contract, car insurance!
While maintenance of the vehicle is not covered within the contract, this is made much easier through a full 3 years warranty and servicing plan. Tax is covered within the monthly payments, while insurance should be sought out separately (fully comprehensive).
Benefits Of Car Leasing
- Lease your favourite car for cheaper through spreading the cost with monthly payments
- Since you’re only leasing, you don’t need to worry about depreciation
- Switch up your car every few years, perfect for individuals that fancy a change
- Most leases are quite short, being between 24 and 36 months
- Has the ability to improve your credit score over time by making regular repayments consistently
- Maintenance and servicing is usually included in the cost of leasing
- A simple and accessible form of car financing
Drawbacks Of Car Leasing
- Car leasing, for the most part, requires a good credit score
- You do not own the vehicle, even after making all the payments
- Any damage or exceeding mile limitations will result in additional charges
- Deposits can sometimes be higher than other types of car finance
- No modifications are allowed to be made to the car
What are the Main Differences Between Hire Purchase and Car Leasing?
1) Ownership
The main difference between hire purchase (HP) and car leasing is in regards to ownership. Although for the entirety of the contract you won’t own the car with hire purchase, after the ‘option to purchase’ has been made you will be the legal owner of the vehicle.
With car leasing, the costs are calculated based on the depreciation of the car. Meaning that brand new cars costs are much higher as they depreciate at a much higher rate - in contrast to older pre-owned cars that have already lost most of their value.
2) Early Termination
Unlike car leasing, contract hire provides the option to cease your contract at any point after you have paid 50% or more of the hire purchase finance. This is called a ‘voluntary termination agreement’ and means that all future monthly payments will be cancelled.
Unfortunately, since the ‘voluntary termination agreement’ is available immediately after the 50% mark, if you go over that and then decide to terminate you will not be refunded the additional payments.
If you’re not just not quite touching the 50% amount, you’re able to pay a lump sum to settle the debt - which unsurprisingly is called a settlement figure.
While car leasing does offer an early termination option, it’s not advised as this can be very pricey. Usually, the price of the termination fee can exceed that of the remaining finance left on the contract - so you’re better just sticking with it if possible.
While hire purchase is more flexible in terms of early termination, it can work out much more expensive than car leasing due to higher interest rates and larger monthly payments.
It’s best to choose a car finance option that you’re able to afford reliably across the entire contract.
3) Mileage
One of the more blatant stark contrasts between leasing and hire purchase is the mileage limitations. While hire purchase can be seen as quite restrictive, with the mileage it seems to do a 180.
With car leasing, the mileage limitations can be quite limiting being that you’re set so many miles throughout your contract.
It’s heavily advised that you’re honest upfront in how many miles you plan to cover (usually between 8,000 and 30,000 depending on the length of contract) as additional charges can be incurred. At 5p to 30p charged per mile over your limit, this can work out at quite the costly exercise if you’re not careful.
Since you’re not working to pay off the depreciation, hire purchase doesn’t limit your miles. This is because the end goal is to pay off the value of the car, therefore taking over the ownership of both the car and the depreciation respectively. Which can be perceived as a positive or negative depending on which way you look at it.
Is it Better to Hire Purchase or Lease your Next Car?
Depending on what exactly you’re looking for, both hire purchase and leasing can be great options to finance your next car. Whether you’re looking for flexibility, lower monthly costs, simplicity or a bad credit score option - the decision is individual to you and your specific needs.
Is Hire Purchase or Leasing Cheaper?
If the cheapest option is what you’re looking for, crunching the numbers can be especially helpful. In terms of both lower monthly payments and lower overall contract costs, leasing takes the biscuit on that one.
But, as mentioned before it depends what you’re looking for - leasing is only cheaper because you’re only paying for the depreciation and mileage, not the value of the vehicle.
While hire purchase you’re paying the full value of the vehicle (plus interest) - so although leasing is cheaper, hire purchase gives you the ability to own the car (depreciation and all).
Hire purchase, since it’s ‘technically’ owned by you is your responsibility to maintain, tax, service and insure on top of monthly payments. This is where leasing comes in clutch yet again by incorporating some of those pesky charges into your monthly instalments.
Should I Choose Hire Purchase or Leasing?
The decision between choosing to lease or hire purchase your next vehicle is completely up to you. You need to weigh up your options, read up on the differences between lease and hire purchase, and decide what’s best for you.
If you’re looking to outright buy your car, it’s worth investigating options such as personal car loans, hire purchase and PCP. While if you’re looking to only rent, car leasing is your winner.
If you need any help deciding, here at Pendle Leasing we provide affordable car leasing for people with a poor credit history. We’re more than happy to talk you through our process and how to come on board, simply browse our range of vehicles or contact us directly.
If you’re wondering what cars we have available, have a gander at our selection of car leasing deals. From a selection of premium brands such as Vauxhall, Renault, and Fiat, we’re confident we have a set of wheels that’ll catch your eye.
