If you’re in the market for a new car, you’ll be faced with a number of options; from which car to choose to the best payment option for your circumstances. In recent years more drivers have been electing to go with some sort of finance deal. Hire-purchase agreements, leasing and an in-between option – personal credit purchase (PCP) – are all proving popular, thanks to the reasonably low monthly payments that enable drivers to get behind the wheel of a luxury car they may otherwise be unable to afford.

The Different Car Finance Options Explained

Purchasing a car outright is pretty self-explanatory. You find the car you want and dip into your savings, or access funds from your pension, to pay up-front for the deal you have negotiated. All maintenance fees, tax, roadside assistance cover and insurance costs are yours. Depreciation costs and selling the vehicle when you’re ready for a change are your problem too – but the car belongs to you. Obviously, not everyone is able or wants, to purchase the car of their dreams outright, and this is one of the reasons why over 80% of new cars are driven away under  PCP finance or lease deal agreements.

Hire-purchase agreements are a type of borrowing. You don’t own the vehicle until you have paid in full and while you’re making payments you aren’t allowed to sell the vehicle without the lender’s permission. Once you’ve made all the payments for the vehicle, you’ll become the owner.

Leasing a car, sometimes called contract hire, involves paying an initial deposit and then regular monthly payments over an agreed term. Over the lease period for a new car, you’ll be covered by the manufacturer’s warranty, and if you lease from Mercedes on Lease you’ll be covered for road tax and roadside assistance too; you can even elect to include maintenance in your agreement to cover the cost of regular servicing. The car will remain the property of the finance company and at the end of the leasing period, you’ll have to return the car.

PCP finance is a kind of combination of hire-purchase agreements and long-term car leasing. Drivers pay an up-front deposit and make monthly payments. At the end of the agreed term, they have the choice of making a ‘balloon payment’ to purchase the car outright or returning the car.

The Pros and Cons of Leasing a Car

Obviously, leasing a vehicle means parting with less cash than an outright purchase. If you’re considering a new car for business, there are other benefits of leasing but will cover these in a later post.

Leasing a vehicle is generally going to be cheaper than a PCP or hire-purchase agreement as there is no requirement to own the vehicle. Additionally, you won’t be tied into the same car for the long term, meaning you’ll be able to take advantage of the latest developments and technological advancements in the automotive industry much more readily. Selling the vehicle when you want to upgrade and depreciation costs aren’t your worry, but the car will never actually be yours.

PCP and hire-purchase agreements can mean you own the car at the end of the agreement – along with all the maintenance costs, resale hassle and depreciation charges. While this is fine if you plan to drive the same vehicle for over five years, Cartelligent – an American car buying company – did some in-depth analysis on leasing a Mercedes-Benz C-Class and found that if you’re likely to update your car after five years, leasing is always the cheaper option.

Ultimately, whichever you choose – leasing a car or purchasing one – the decision should include a thorough analysis of your finances and include depreciation as this is often the biggest cost of owning a car. When making your choice, it’s worth keeping the words of oil baron billionaire, J Paul Getty in mind; “If it appreciates, buy it. If it depreciates, lease it.”