The advantages of leasing rather than buying new cars

Feb 19, 2020 | Tony Byrne's View

What with the advent of hiring music (Spotify) and films (Netflix), could the leasing of new cars supersede the buying of them in much the same way?

There are 4 main ways to finance a new car namely;

Personal contract purchase (PCP)
Hire purchase (HP)
Personal Contract Hire (PCH)
Personal loan (PL)

The choice can be confusing if you do not fully understand the difference between each financing option. The following is a brief summary of each method.

Personal contract purchase (PCP) requires the payment of an initial deposit, followed by fixed monthly instalments. However, the monthly instalments pay off the depreciation of the car, not its entire value, over the course of the term. Therefore, you will pay off the depreciation and a typical APR of 4-7 per cent on the interest. When you get to the end of the agreement, you either pay a final balloon payment if you want to keep the car or return the car (subject to excess mileage and fair wear and tear charges) if you do not wish to keep the car and want to avoid making the balloon payment.

Hire purchase (HP) requires the payment of an initial deposit followed by paying off the entire value of the car in fixed monthly instalments. When all payments have been made, the HP agreement ends and you take ownership of your car.

Personal contract hire (PCH) also known as vehicle leasing is a type of long-term rental that will suit you if you are not looking to buy the car at the end of your contract and won’t need to change the car before the end of the contract. You lease the car via a dealership or leasing broker for an agreed period of time by making a one off upfront deposit payment (usually equivalent to 3-6 monthly payments) followed by fixed monthly payments. When the contract expires you simply return the car, subject to excess mileage and fair wear and tear charges.

Personal loan (PL) is a way of self-financing your car purchase via your bank, approved lender or a car finance broker such as CarFinance247. The loan can be for the full purchase amount if you wish to pay in cash, or it can be used to make up a shortfall supplementary to a cash deposit you already have earmarked for a new vehicle.

For the purpose of this blog I will focus on personal contract purchase and personal contract hire. You should bear in mind that I am only concentrating on ways to finance a new car every 3-4 years on average. If you prefer to simply buy your new car for cash this blog may not be for you though I wouldn’t ignore it. Why? Well it may make more sense to invest your money where it is likely to grow in value, take out low cost car finance instead and resist spending a capital sum on an asset which will definitely depreciate in value.

If your wish is to finance your new car with the intention of owning it at the end of the term then personal contact purchase is the method for you.

If, on the other hand, you are happy to return the car at the end of the term then personal contract hire should be your preferred choice.

If you own a limited company, especially if you are buying a 100% electric car, meaning one with zero CO2 emissions, then a company car would be a fantastic choice for you from 6 April 2020. Why? Because the taxable benefit in kind in 2020/21 will be zero, rising to just 1% of the value of the car when new in 2021/22 and only 2% in 2022/23. In my entire working life I have never known a more tax efficient way to benefit from a company car. It is literally a once in a lifetime opportunity for you.

We do have many clients who like to buy their new cars for cash either from existing cash savings, from encashing investments or even from tax free cash lump sums taken from their pensions.

So the choice really is yours but before you buy that next new car do consider your options carefully. It may make more sense to use car finance rather than buy that car for cash. Just ask us to run a “what if” scenario on our lifetime cashflow software and we will demonstrate the best option to you. You know it makes sense.

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