Buying a car - is it better to lease or buy outright or get a loan?

Horasio

What are the benefits of leasing over buying a car outright or paying in instalments?

Astaroth

Benefit of leasing (especially if it is a maintained lease) is you have a fixed amount to pay every month which you know from day one. There is no risk that your car will suddenly be devalued by the model being replaced or the manufacturer going bust and all servicing etc is paid for.

DavidHM

The benefit of buying outright of course is that all the benefits of leasing have to be paid for, i.e., there is a finance company that has to borrow money to pay for the car itself and passes those costs on, plus a profit margin, to you.

In order to guarantee what the car will be worth, the company has to be coservative in its estimates so whilst you won't find that the car is worth less than you expected, you might still have paid more in depreciation than you ctually needed to.

You generally get a lower monthly payment but that's because there is still effectively a large amount outstanding at the end of the lease, to be paid off either by you buying the car or the lease/PCP company selling it on. That's good, except that it means that you are paying interest on a larger amount over the entire life of the loan as the average balance is greater.

If you have sold your car to pay the deposit on this lease, where will the next deposit come from? With a PCP it might come from equity in the car, if it is relatively small, but equally it might not. At the end of a loan, you have the option of keeping the car without making any further payments - so if your circumstances change and you're happy to drive an older car, a loan can be easier. Similarly, if you want to get out during the life of a loan you will probably be able to sell the car and pay off the loan separately, whereas with a lease you are tied to the lease company's terms and conditions and could end up paying them to take the car and get you out of the lease.

Finally, because you can get a loan separately from the car, whereas lease and PCP finance tend to be arranged with the car purchase, you might get a better interest rate (or effective interest rate as a lease is a rental agreement, rather than a loan) by getting a loan.

One big but hidden advantage of a lease is that lease companies often get better deals on cars and can pass those on, often so that manufacturers aren't seen to be discounting - thus keeping both new and used purchase prices high.

There's no right or wrong answer but most people are better off with a loan unless they value the convenience of a lease, and a shiny new car, more than the financial saving.