There are many different ways to get your hands on a car these days. The two most popular options being car leasing and buying a car (either outright or on finance). In this article we’re going to take a look at these two, how they differ and the advantages and drawbacks of each. I’ll warn you ahead of time. There is not one “right” answer for everyone, it really depends on your personal circumstances, but with everything laid out for you, you should find it easier to make the best decision for you.
A car is not a castle
As Brits, we like to own stuff. For example, we buy houses, whereas most of Europe tend to rent long term unless you are particularly affluent. So it’s natural to want to own a car, you are “in control”. As Brits, we’re a nation of finance, as long as the finance means that you own the thing at the end of the agreement, so many people will feel uncomfortable with the concept of leasing a car but try to have an open mind.
Buying a car has one major difference to buying a home. When you take out a mortgage on your home you know that by the time the mortgage is finished, the house will be worth more than you paid for it. It’s an investment.
However, with a car, unless it’s a classic car it will depreciate in value. It’s a pretty terrible investment. So, we should not be as attached to ownership but should try to find the model that best fits our needs.
The finances of car leasing vs buying a car
When you buy a car, you have to pay for the full value of the car, because you will own it when the finance (if you’re taking finance) is finished. Whereas, when you are leasing a car, you only pay for part of the value of the car. The difference between the price the car is bought at, and the value of the car once the car lease is finished.
The great thing about car leasing is that it’s up to the leasing company to estimate how much a car will depreciate in value. You get presented a price per month, and you don’t need to care about the details. Plus, it’s so much more affordable because you’re only paying for a portion of the car.
Buying a £15,000 new car with 3 years finance : £15,000 / 36 months = £416
Leasing a £15,000 new car, over 3 years (estimated 36% depreciation) £5600 / 36 months = £150
You have a decision to make. Do you want to pay much less each month, or do you want to own a car at the end of the finance, that’s ultimately going to depreciate in value?
You can see why car leasing is increasingly popular, but it does have some drawbacks.
You are not in complete control. For example, your mileage. When you lease a car, you have to say upfront how much mileage you will put on the car, so the leasing company can estimate the re-sell price. If you go over the mileage, you’ll be asked to pay a fee to cover the loss of value in the car.
And the major drawback is that you never own the car. So if in 3 years, your personal circumstances have changed, you still have to give the car back, and if you don’t have the cash, you’re going to be without wheels. If you had bought the car with finance, you’d own the car then , and can drive it until your personal circumstance change again and you can afford to upgrade your car.
If things go wrong during the lease period, you are not able to give the car back as you could with car finance (Voluntary Termination) although it does destroy your credit score. For the first 18 months, the lease company is making a loss on the car, because of the speed the car depreciates in value. After 18 months, it’s possible, but it’s not a right, you need to the finance company to agree.
It’s easy to see why car leasing is so popular. You don’t have to pay a lot up front. You don’t have to worry about the car, it’s brand new and under full warranty, and you have 1 set fee to pay each month. It makes budgeting super easy. In fact, owning a car doesn’t make a lot of financial sense because it’s always going to lose value.
But, if you don’t have stable work and you are not sure being tied down to 3 years (although you can get 12 month and 24-month contracts too) is right for you, then you should look at buying a car on finance. Because, in the worst case scenario, you can always give the car back, or sell it. It really depends on your personal circumstances.