Should you buy or lease your next car?

There are many ways to acquire a new car and it’s not surprising that there’s some confusion about which is best.

In this guide, we’ll define buying and leasing and look at the differences between the two to help you decide which would best suit your lifestyle.

Leasing vs buying: what’s the difference?

Buying a vehicle refers to both cash purchases and finance agreements, like hire purchase. With hire purchase, you pay a deposit and then finance the outstanding amount over an agreed period of time while paying interest on what you borrow. Whichever purchase method you choose, you’ll be the owner of the car at the end of the agreement.

Leasing, also known as contract hire, is a fixed agreement where you pay a monthly rental and then return the car by the pre-agreed date. Whether you choose to lease or buy your next vehicle depends on your personal circumstances and your end goals.

Do you need to own the car, or just use it?

Do you develop an emotional attachment to cars, or do you see them as a necessary evil that often costs you more than you’d like? Do you see your car as a member of the family, or just a ‘tool’ to get you from A to B? You’ll need to ask yourself these questions before deciding whether to buy or lease a car as each option has very different financial implications.

Depreciation: the cost of ownership

Most cars depreciate in value. This means that, as soon as you buy a car, it will be worth less than the price you paid for it. Brand-new cars depreciate especially quickly. The majority of new cars lose up to 60% of their value in the first three years. You should consider depreciation as one of the costs of ownership, along with servicing, maintenance, insurance, and fuel. If you purchase a car with a finance agreement, you may face more depreciation than a cash buyer, due to the interest you’ll pay on top of the screen price over the finance period. Together, this is referred to as ‘total amount payable’. However, once the finance agreement ends, you have the option to sell your car and release cash if required.

With leasing, you don’t have to worry about depreciation because you won’t own the car and hold that risk. The amount you pay to lease a car is the difference between the value of the car when new and the anticipated value once you hand the car back. This is the depreciation, as the finance company will sell the vehicle on once you hand it back. So, if a car is worth £20,000 new and you want to use it for three years with 10,000 miles per year, the finance company may predict the car will be worth £6,000 once the agreement ends. Therefore, you’ll need to pay £4,000 annually over three years.

Damage and the choice to repair

Cars get damaged – it’s just the nature of motoring. As a car gets older, you’d expect it to get a few scratches, stone chips on the paintwork, and maybe a few minor dents. You’d also expect the interior to show some signs of use. This expected damage is known as ‘fair wear and tear’.

If you own a car and it gets damaged, then it’s entirely your choice whether to repair it or not. You’re unlikely to fix minor issues like the odd scratch, but you will probably want to repair significant damage caused by accidents like clipping a wall or reversing into a barrier. Either way, repairing your car is your choice.

When you lease a car, you have a responsibility as part of the agreement to keep it in good condition. If you lease from a reputable leasing broker like AMT Auto, you’ll be protected by the BVRLA fair wear and tear guidelines, so you don’t need to worry about the odd small scratch or dent. If you’re unlucky enough to damage the car more significantly, then you’re responsible for getting it repaired before you hand the car back.

Mileage: unpredictable or fixed?

You don’t generally think about mileage when you buy a car. However, the mileage that you do each year is one of the key criteria that determines your monthly payments with a leasing agreement. If you go over the anticipated mileage by the end of your contract, then you’ll be liable for an excess mileage charge.

This charge is on average about 10p per mile, but it will be more for luxury and prestige cars. If you think that your mileage may change during the time you have the car, you may want to think about increasing your mileage limit. Remember: it’s the mileage at the end of the contract that counts, not the mileage at the end of each year.

If you’re confident that your mileage is going to be fixed and low each year, such as 12,000 miles or less, then leasing can be a great value option.

Low and predictable running costs

One of the benefits of leasing a car is the predictability of running costs. When you lease, the car is brand new, and will be covered by the manufacturer’s warranty for at least the first three years (subject to the mileage guidelines). You can also take out a maintenance package at an additional monthly cost, which will cover all servicing and maintenance costs, as well as replacement tyres. These packages typically save you money compared to managing these costs on an ad-hoc basis.

When you buy a new car, you’ll still be covered by the manufacturer’s warranty, the same as when you lease. You can also buy care packages which cover servicing costs over an agreed period and help to keep your costs fixed. However, you should check everything that these care packages cover, to see if they’re comparable to a leasing maintenance agreement, as they usually cover less.

Changing your car

When you lease a car, you have to keep it until the end of the agreement or pay an early termination charge. This is often at least 50% of the outstanding payments, so it can be expensive if you’re early on in your contract.

When you buy a car, you can change it at any time. If you’ve taken out a finance agreement and you want to sell your car, you’ll need to pay off the outstanding finance using the cash raised from the sale. This can be risky if the sale value is less than the amount owed in finance.

Is there really that much difference between the cost of buying and leasing?

There can be a big difference between the cost of buying and leasing, particularly as the screen price of the vehicle increases. For example, a brand-new Range Rover Velar D180 S could have list price of £49,340*. If you were to lease it for three years with an annual allowance of 10,000 miles, your total outlay, based on paying 6 months’ initial rental of £3,266.22 and 35 payments of £544.37 would be £22,559.16*. That’s less than half of the list price.

If we compare a much smaller car like the Ford Fiesta 1.0 Zetec 3dr, on a list price of £15,615*. On a three-year lease at 10,000 miles per year, six months’ initial rental of £1362.96 and 35 monthly payments of £151.44, you’d pay £6,903.35* in total over the course of the contract.

*Figures are from the AMT Auto website and include administration fees, quoted in November 2018.

Summary

There are many things you need to consider before deciding whether to lease or buy your next car. However, it’s clear that leasing can get you a new car for much less financial outlay than buying. You’ll need to take into account depreciation, damage, mileage, predictability of costs and the flexibility of changing cars before making a decision, as leasing doesn’t work for everyone.

Ultimately, it’s up to you to decide which option best suits your lifestyle. As reputable and knowledgeable leasing experts, AMT Auto can provide you with the perfect car to meet your needs.