When it comes to Hire Purchase (HP) vs leasing, the fundamental difference lies in the ownership of the asset in question. In a hire purchase arrangement, you make monthly payments and pay an optional purchase fee, after which ownership of the car is transferred to you upon completion of payments. When it comes to leasing, you only pay for the depreciating value of the car over the life of your lease contract, and, unlike in hire purchase, you won’t own the car at the end.
What is hire purchase?
Hire purchase car finance is a form of financing ideal for people looking to own a new/used car, but don’t want to pay the whole amount outright to get the car.
Car dealerships, as well as online brokers, typically offer the hire purchase financing option. Dealerships can also arrange for the subsidized 0% APR representative thanks to their connection with auto manufacturers. But to qualify for this type of offer, you will need an outstanding credit score.
It also requires a non-refundable deposit of about 10% at the start. This is then followed by monthly payments to be made over 1-5 years.
At the end, and before completely paying off the finance, you will need to pay an ownership fee of about £100-£200, after which ownership of the car will be transferred to you and you can even choose to sell it.
What is leasing?
Car leasing can simply be described as renting a brand-new car for a specified amount of time (often a few years, but can be longer or shorter). Here, you pay an initial rental fee followed by fixed monthly payments over the course of the contract.
What’s important to note is that you won’t possess ownership of the car at the end. Upon completion of payments, the vehicle will be taken back, and you can then decide whether you want to take out another deal on a newer model.
Keep in mind that you will need to select a yearly mileage allowance for the vehicle. An inspecting agent will check the accumulated mileage at the end, and as long as the car is maintained in good enough condition and hasn’t exceeded the agreed-upon mileage limit, you won’t be charged any extra fees.
Hire purchase vs leasing: Which is right for me?
Hire purchase is among the most well-known forms of car finance. While HP isn’t as sought-after as the likes of Personal Contract Purchase (PCP), which typically have lower monthly payments, HP offers a range of benefits that are worth considering, especially if you are looking to buy a car.
Leasing is a fairly new concept that allows drivers to hire a new car every few years by paying affordable monthly payments but without the option of owning the car.
Now that you have an understanding of what a HP arrangement and a lease deal entails, you might be wondering which one is right for you.
How much can I afford per month?
Given that, in a hire purchase arrangement, the payments you make every month will go towards covering the total cost of the vehicle, you can expect your monthly payments to be higher than if you were leasing the car.
You also have to consider the fact that since HP is a type of loan for the vehicle, you will see fluctuating interest rates. Typically, short-term agreements, for example, one year, will have much higher interest charges than longer-term contracts – ranging from as low as 2.8% to as high as 15%, and will also vary depending on your credit score.
On the other hand, in a lease deal, the payments you make every month go towards covering the depreciation of the car. It takes into account the annual milage, the model, and contract length. The provider uses this information to determine the future value of the car at the end of the deal. As a result, the bulk of the hiring fees will be less with leasing.
Can I afford a balloon payment?
HP arrangements are meant for people who are looking to possess ownership of the car upon completing paying the fixed monthly hire payments.
Basically, the final purchase fee in a hire purchase agreement is usually at a fraction of the cost of the vehicle. On the other hand, in a PCP agreement, the final optional ‘balloon payment’, that pays off the remaining debt owed to the dealership, is usually much higher since a significant amount of the money borrowed is usually left till the very end of the deal. The monthly payments in a PCP agreement cover the depreciation of the car instead of its full value, as is the case with hire purchase.
When leasing a car, there will be no fee at the end to finally own the car, however, there may be some extra charges to cover excess mileage or damage exceeding reasonable wear and tear.
What is my mileage?
Granted, no one can be able to precisely predict how many miles they will drive each year. Even if you are able to work out an average, you will still have to throw in an extra 1000 miles or more for potential and highly likely emergency trips. But then this means that you will end up having to pay more every month for something that you may not even use.
There is usually an argument against hire purchase and that is its lack of flexibility. Basically, you have no option but to own the car in the end. However, it offers a lot of flexibility when it comes to the use of the car. Unlike leasing and PCP finance, you are not required to declare an annual mileage cap.
In a hire purchase arrangement, the provider doesn’t have to take into account the Guaranteed Minimum Future Value (GMFV) of the car. Unlike in leasing, where the payments cover the depreciation of the car over the life of the contract, HP finances the whole cost of the car.
This means that you are free to drive the car as much as you desire or need to. You don’t have to worry about incurring any excess mileage charges.
On the other hand, leasing is much more restrictive since you have to contractually agree to a fixed annual mileage limit ranging from 8,000 to 30,000 miles. And instead of the total being checked at the end of each year, it is usually worked out at the end of the deal. To avoid any extra charges at the end, it is important that you figure out and be honest about the distance you intend to cover in the car. Keep in mind that these additional charges can be expensive with the rate being 5p-30p per mile, but vary depending on the provider.
While high mileage lease deals (50,000+ miles per annum) are offered, there is usually a cap on how much you can do. Thus, leasing isn’t an ideal option for you if you think that you will drive for more than is allowed.
Early termination
In a HP arrangement, you can return the car if you’ve paid more than 50% of your HP finance. This is referred to as a ‘Voluntary Termination’ agreement, meaning that the remainder of the payments will be terminated.
If you haven’t yet paid off 50% of your HP finance, you have the option to do so in one lump sum. This is known as a settlement figure.
But keep in mind that if you’ve settled more than 50% of your finance and decide to cancel the agreement, you won’t get a refund for the extra amount paid above 50%.
On the other hand, a lease agreement can only be terminated early if you agree to pay a hefty termination fee. This is usually significantly higher than the total remaining finance on your deal. Thus, it is crucial that you only go for a contract length and monthly price that you can commit to.
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