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Car Leasing vs. PCP Pros and Cons

Posted by: VIP Gateway, 9th Nov 2023

Car Leasing vs. PCP Pros and Cons

There are different options available if you want to get behind the wheel of a brand-new car. Leasing and Personal Contract Purchase (PCP) are two of these options. They may seem similar at first glance.

However, although car leasing and PCP are both car finance agreements, there are some important differences that it helps to know about if you’re wondering whether car leasing or PCP is the best choice for you. Reading our guide will show you what leasing and PCP are and what the differences are between them. You’ll also discover the pros and cons of both options. This information will help you make an informed decision between car leasing and PCP.

What is car leasing?

If you lease a car, you can drive it for a set period before returning it. The leasing process is stress-free. You simply:

Choose the right lease deal for you.
Have your finance arrangement agreed on the completion of a positive credit check.
Sign your car lease agreement.
Take delivery of the vehicle.
Pay an upfront payment and regular monthly payments.
Return the vehicle at the end of the lease period.

The monthly fee you pay is calculated using the agreed annual mileage, the amount of your upfront payment, and the length of the lease agreement.

At VIP Gateway, you have access to a large selection of lease vehicles to choose from, including electric car leases and used car leases. These vehicles are available for personal car leasing and business car leasing. If you lease a vehicle for a VAT-registered business, you can claim 100% of the VAT on monthly payments if the car is used solely for business purposes and 50% VAT if the car is used for business and personal purposes.

When you lease a car, you can choose from in-stock cars, which are already built and available for lease, and factory-order cars, which are built to your requirements. Read our post In Stock Lease Vs. Factory Order for more information about this.

What is Personal Contract Purchase (PCP)?

Like car leasing, PCP is a finance agreement that allows you to pay a deposit followed by monthly instalments. However, unlike car leasing, you have the option to buy the car outright at the end of the PCP contract.

You do this by making a final payment that’s known as a balloon payment. This payment is equal to the guaranteed minimum future value (GMFV) of the vehicle that’s calculated by the finance company at the start of the PCP deal. If you decide not to buy the car, you can hand it back and take out a contract for a new vehicle if you wish.

The main differences between car leasing and PCP

You can see that car leasing and PCP aren’t the same as each other. Below, we’ll delve further into the main differences between them to help you determine which is best for you.

Car ownership

The main difference between leasing a car like a Nissan Juke or a Hyundai i30 and signing a PCP agreement is whether you can ever own the car or not. When you lease a vehicle, it always belongs to the finance company. Meanwhile, when a PCP contract ends, you have the option to make a balloon payment to own the car.

How monthly payments are calculated

Monthly lease payments are based on considerations such as your agreed mileage requirements, and there’s no interest to pay. PCP payments are based on the car's full value, and interest is payable.

How much warranty is included

In most cases, lease cars are new. This means they come with a manufacturer’s warranty, usually three years. So, you don’t have a problem if your lease vehicle develops a fault, as most mechanical issues are covered. The same applies to brand-new PCP cars. However, many PCP cars aren’t brand new, so they have a shorter warranty or no warranty at all in place. If you have a PCP agreement on a car, and the warranty has expired, you’ll need to pay the cost of any repairs.

Road tax

Road tax is included as part of a car lease agreement. However, if you have a PCP contract, you’ll need to meet this expense yourself.

Early contract/agreement termination

It’s usually easier to terminate a PCP contract early than it is to end a lease agreement before the agreed date. This is because a lease agreement is calculated on the understanding that you’re borrowing the vehicle for a set period. If you have problems affording car lease payments, the finance company may provide you with a termination fee, which is likely to be around 50% of the total payments left on your lease agreement. If you have a PCP contract in place, you can cancel through voluntary termination once you’ve paid 50% of the full contract. You can get a settlement figure from the finance company if you haven’t paid 50%.

Final payment

When you make a final payment on a lease agreement, you won’t have any further payments to make if any wear and tear to the vehicle is fair and you haven’t exceeded the agreed mileage. You’re also free to look at in stock and factory order deals and choose a lease for a new car. When a PCP deal ends, you can make a final balloon payment to purchase the car. This payment is based on the estimated value of the car.

Risk of depreciation

Depreciation is factored into monthly lease payments. So, while you won’t have any equity when the lease period ends, you don’t have to be concerned about depreciation risk. The situation is different with a PCP contract. The balloon payment you must pay at the end of the contract if you want to own the car is calculated at the start of the contract. This is the amount that the finance company thinks the car will be worth at the contract end date. Even if the value of the car depreciates more than expected, the set amount is payable. This means that it’s possible to end up in negative equity. However, positive equity is also possible if depreciation is less than expected.

Which is cheaper, leasing or PCP?

You’ll normally pay more for a PCP contract than for a lease agreement. This is because you have the flexibility to buy the car at the end of a PCP contract. You may be able to secure a PCP contract for a used car more affordably than leasing a brand-new vehicle.

However, if you don’t want a used car, leasing is usually a more affordable option. This is especially the case if you’re looking for a luxury car, such as an Alfa Romeo, a Mercedes-Benz, or a BMW. These vehicles tend to depreciate less, and this helps to reduce lease payments. On the other hand, they can be very costly in terms of a PCP contract.

Car leasing vs. PCP pros and cons

To make it easier for you to decide between leasing a car and PCP, we’ve included the pros and cons of both options in the table below.

	Pros	Cons
Car leasing	Depreciation isn’t an issue	You can’t purchase the vehicle at the end of the lease
	Road tax is included	End-of-lease fees apply if the mileage allowance is exceeded or there’s excessive wear and tear
	Reselling isn’t a concern
	Upgrading to a new car regularly isn’t a problem

PCP	There’s an option to purchase the car at the end of the contract	Interest is payable on top of regular payments
	The car can be handed back at the end of the contract, and a contract on a new vehicle can be taken out	End-of-contract fees apply if the mileage allowance is exceeded or there’s excessive wear and tear
	Monthly payments are often lower than for other purchase options	A balloon payment is payable at the end of the contract to purchase the vehicle
		Road tax isn’t included

The verdict

Overall, leasing a car is a good choice if you want to drive a new car every few years and you aren’t concerned about ever owning the vehicle outright. If you do want the option to buy the vehicle, PCP is a better choice. It’s an especially good choice if you’re happy to drive a used car, as PCP contracts that aren’t for new vehicles are often more cost-effective.

If you need more information about leasing a car as opposed to PCP, we’re happy to help. Call us on 0161 814 9623 or email hello@vipgateway.co.uk to speak to a member of our team. We’ll give you honest advice about whether car leasing is the best choice for you.