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Ask any number of people whether you should buy or lease a car and you are bound to get a whole load of different answers. The right answer is that it depends on your personal circumstances.
Car Buying:
Some people prefer to buy their own car. They like the idea of owing an asset, although if you have bought the car on finance you have to consider who actually does own the car. Under a hire purchase or personal contract purchase the finance house owns the car until it is paid for in full, not the person in whose name the finance was arranged.
Advantages:
- You own an asset (subject to above and also the impact of depreciation)
- You can decide when and where to have the car serviced. We all know that we should work to the guidelines enclosed in the manufacturer’s handbook but when you own the car you make that decision.
- You can decide whether to buy new or used
- You can decide on the spec, model and manufacturer
Disadvantages
- Depreciation – a new car loses a significant portion of its purchase price as soon as you drive it away from the garage
- You must cover all the costs associated with the car i.e. the servicing, insurance, depreciation etc
- Busy dealerships are less likely to take much notice of an individual who has purchased a defective car than a fleet manager who is responsible for a suite of leased cars.
Car Leasing:
If you like driving the latest model car and like to change it on a yearly basis, leasing may be the best option for you. If you are self employed you may have been advised by your accountant or tax advisor to lease rather than buy. You may be entitled to reclaim the VAT if your business is Vat registered. This is worth looking into if it applies to your circumstances.
Advantages:
- You will be driving a brand new car, usually with high design specifications
- If there is something wrong, it will be dealt with for you and you usually receive a replacement car if necessary.
- It can be cost effective and tax advantageous for certain types of business owners
Disadvantages:
- The monthly payments are not adding anything to the value of your personal estate as you will never own the vehicle
- It can be expensive depending on the deal you are able to get
If you don’t like the idea of leasing but cannot afford to buy the car you want either outright or via monthly loan payments, you might want to consider Personal Contract Purchase. This is a relatively new method of purchasing a car. You pay a deposit upfront and regular monthly payments as you would a hire purchase agreement but the payments are usually a lot lower than those under a similar sized loan. Then you would pay a balloon payment at the end if you want to keep the car. If you don’t want to pay this final payment you just hand the car back making it very similar to leasing. You could trade the car in against a newer model.
Don’t make the mistake of arranging very low monthly payments; this will increase the size of the balloon payment. Car depreciation means you could end up owing more than the car is worth.
It is also worth noting that banks and other financial institutions offer Personal Contract Purchase plans so do shop around and don’t just take the first deal offered by your car dealer.