8 Differences Between Car Leasing and PCP

What is car leasing?

Car leasing is just like it sounds. You lease (or as it's otherwise known, 'rent') a car for a fixed period. The lease period is typically between two and four years. But it's pretty flexible, so leasing companies may accommodate shorter and longer agreements.

If you lease a car, you won't ever own the vehicle as it's returned to the finance company at the end of the contract. However, this is a great way to upgrade regularly and avoid a hefty balloon payment. You can learn more about the car leasing process in our complete guide.

What is PCP?

Personal Contract Purchase or PCP is a type of car finance similar to a car loan. You generally put down a deposit, and the rest of the car's value is split over the agreed with interest added. However, this finance also includes a larger instalment at the end of the contract – a balloon payment. This is based on the car's guaranteed minimum future value (GFV).

You can pay this and own the vehicle outright, hand it back or trade it in for an upgrade.

There are some notable differences between car leasing and PCP. Below, we cover the main aspects to help you select the best option.

1. Leasing means renting - PCP means the option to buy

Car leasing means you rent your choice of vehicle for a fixed length of time. At the end of the contract, you return the car.

With PCP, you will make monthly instalments and then have the option to buy the car when your agreement has finished for an additional cost.

2. You don't pay interest when you lease

When you lease a car, you will not have to pay interest. The monthly instalments are agreed at the start of the agreement and remain fixed throughout the duration of the lease period. You do not need to pay interest because are not buying the vehicle, just renting it.

On the other hand, PCP works differently. Because you are borrowing the full value of the car over an extended period, you will pay interest – it is like taking out a loan. Your payments will be directly linked to the interest rate offered by the finance company.

3. Leasing gets you a new car with a warranty

With leasing, you can drive away a brand-new vehicle. This also means the car will still be within the manufacturer’s warranty period, so any major issues should automatically be covered.

PCP offers the choice between paying for a new or used car. Paying for a used car will be cheaper, although it may not come with the same warranty or level of protection available with a new car. This leaves it up to the customer to decide whether the price is more important to them than the value of have ongoing security.

4. Initial payment or deposit

Before you can lease a car, you will need to make an initial payment. This is not a deposit that will be repaid later. Instead, you are given the choice of paying anywhere between 3-12 months upfront. This will be deducted from the total amount payable, which in turn lowers your monthly instalments.

PCP requires you to pay a deposit, which can be as high or as low as you want. If you pay a higher deposit at the start of the contract, this will lower your monthly payments. However, if you want to buy the car, remember you will need to pay a balloon payment too. The size of your deposit will not affect the amount required to purchase the vehicle at the end of the agreement.

5. Ending the contract early

Lease payments are based on the car's predicted value for the duration it is being rented. This means that leasing tends to be a cheaper option compared to PCP, which asks you to pay for the price of the car, plus interest, over the full course of the agreement.

As a result, you cannot return a lease car back to the company before the end of the contract. If your circumstances change, or if you decide that you no longer require the vehicle, you will be required to pay an early termination fee.

With PCP, it might be more expensive with the interest included, but you can legally return the car once you have paid at least 50% of the total amount payable. This is what is referred to as a voluntary agreement.

6. Returning the car

If you know you want to drive a brand-new car every few years, leasing can be a good option because you always return the vehicle at the end of the contract.

PCP works slightly differently. There are two options available: you can either return the car as above, or you can pay the optional final payment and become the owner of the vehicle. If the car is worth more than the optional final payment, you can choose to trade it in and use the equity to help fund your next car.

However, there are some costs associated with buying your PCP vehicle, which you can read about below.

7. PCP balloon payment

At the end of the agreement, there will still be a significant amount of money outstanding. If you wish to buy the car, you will have to pay what is known as a balloon payment. This lump sum will pay off the remaining debt on the agreement, so you can drive the car away as the owner.

8. Equity from PCP

The balloon payment is based on the car's guaranteed minimum future value at the end of the agreement. However, if you have exceeded the annual mileage or the vehicle value has significantly depreciated throughout the contract when you come to the end of your PCP agreement, the valuation of the car may be worth less than the amount of debt outstanding.

While you can opt to return the vehicle at the end of the agreement, you may be required to pay an excess mileage charge and will not have any equity to put towards your next car.

How do I know if leasing or PCP is best for me?

To decide which contract is better for you, you should think about:

• Whether you want to have the option to own the car
• If you want to drive a new car every few years
• Your finances and which contract is the most affordable
• Whether your circumstances are likely to change in the future

It's also a great idea to weigh up the benefits of car leasing vs PCP, which include the following:

Low fixed monthly costs

Pick a car suited to your budget and pay fixed monthly instalments throughout the duration of your contract.

Regular upgrades

Leasing contracts are between two and four years means you can regularly upgrade your car.

Low initial payment

Choose your initial payment from between one and 12 months rental. This payment also comes off the total lease costs, potentially meaning lower instalments.

No balloon payment

At the end of the lease, you return the car, so there's no hefty balloon instalment to pay.

Reduces extra costs

Depending on the lease period, you typically won't have to MOT the vehicle, plus road tax is included within the lease. Adding a maintenance and insurance package is also available, so everything is covered.

Quick and easy leasing process

Getting your lease car couldn't be simpler. Contracts can be arranged in as little as ten days.

No need to worry about depreciation

Unlike PCP, you won't need to resell the car or consider its residual value. The finance company factors in the depreciation, so your payments are always fixed.

Easy returns

Handing a lease car back is simple. You just need to ensure the vehicle meets the fair wear and tear policy.

If you still need clarification and more information, read more about the benefits of leasing and see how it could save you money.

Or, if you're ready to start your lease now, see our latest leasing special offers and get top value on your next car. We've got great deals from Kia, Vauxhall, Peugeot and more – check them out now.