Buy vs Lease?

[squerble]

What Fox said above is very true. Lease has become a synonym for PCP, PCH, proper Lease.

As you say, lease these days is used to cover the three main types of secured car financing. For the OP/anyone not sure:

PCH = Personal Contract Hire or a "proper" lease - you'll pay monthly but have to give the car back and never own it.
PCP = Personal Contract Purchase - you'll pay monthly still, but will own at the end of the term, though usually after a big balloon payment (at which point lots of people give the car back to dealer to start a new PCP etc. etc.).
HP = Hire Purchase - you still pay monthly, but you pay off the entire cost over the hire period (so no balloon payment at the end, sometimes a nominal £1 option-to-purchase fee), and own at the end. This is usually what dealers give you when you purchase a used car on "finance".

With PCH and PCP, you will have annual mileage limits and have to pay more money if you go over them; with HP you won't.

General rule of thumb would have the ascending order of overall costs as: cash < personal loan (not secured against car) < PCP < HP < PCH. Sometimes the lease deals would bring down PCH to be around the same as a personal loan or even cash when you amortise all the payments, but very recently they haven't been. Plus at the end of a lease you have to look for another car and may have to choose a car you don't like as much if there's a really good deal on it etc. So while it is convenient (and indeed nice) to have a new car every 2/3 years, it's actually somewhat inflexible unless you're happy to pay.

To OP, get cost options for all the above and work out the total cost of each option. Lower monthlies don't necessarily mean you're getting a better deal. At the time I bought my current car in 2019, I'd forgotten to get myself on the electoral register and I was being offered upwards of 9% on a personal loan, but ended up getting a HP deal at 5.9% (I was happy with the total cost - I was picky to the extreme about the spec of the car and there was usually only one or two in the country that had the particular options and equipment level I wanted, and yes that's silly to some when it's a Ford Focus) so that was cheaper for me at the time with a failing 11 year old Fiesta.

 

[Lopéz]

Or alternatively just buy a car you can afford and have zero debt.

This +1!

If you can't afford to buy a car outright then you almost certainly shouldn't buy it with interest/lease charges added on.

If the debt is affordable, why would you want to do this? Would you buy a house outright with cash? Or finance a large extension? I'd wager the answer to that, in most cases, would be "unlikely"

 

[Greebo]

No, paying £11k for 2 years in a Citroen C4 1.2 is about as far from a 'good deal' as it's possible to get.

The list price is simply not a relevant number in any calculation. Few people pay it and it doesn't represent the new cost of the car.

getting a new Citroen C4 1.2 fullstop is the bad deal but if that was the car you wanted why would you buy it outright when its going to lose £11k in its first year if you could lease it for less than £11k over 2 years?

But I take on board about nobody pays list but lets say you manage to get the citreon for £13k instead of its £18k list price, its still going to lose £6,500 in the first year and several more thousand in the second.

The criteria that the in order for the lease price to be a good deal it should be less than 20% of list price for 2 years seemed flawed.

In the Citreons case that would mean the lease cost would need to be less than £3,600 and the only way that buying a new one would work out cheaper would be if you managed to negotiate a 50% discount off list price and bought it for £9k. Not likely to happen is it?

 

[Jarrod]

If the debt is affordable, why would you want to do this? Would you buy a house outright with cash? Or finance a large extension? I'd wager the answer to that, in most cases, would be "unlikely"

Exactly

 

[HangTime]

as small as 20%? Is that all a car loses in value over 2 years? Surely its more than that?

I tend to do 3 years and if lease is less than 50% then I see it as a good deal. Not many cars are worth 50% of their new valuer after 3 years.

There's a couple things to state here:

1) Remember that most people shouldn't be paying list for a new car anyway. So a car may lose 50% over 3years compared to list price but you would rarely pay full price in the first place, you would typically go via a broker, use a manufacturer discount scheme or whatever. So you may have only paid perhaps 80% of the list price if you bought outright anyway and hence the depreciation to you as first buyer is actually less than it appears at first glance as 20% of it is covered by the seller. Some cars like Tesla etc are harder to achieve discounts off list on, but then they rarely have cheap leases either, so it's a bit of a moot point.
2) 20% over 2 years IS low - that's kind of the whole point of why people target it as a rule of thumb when looking for a 'bargain' lease. Because list prices can vary wildly compared to what people actually pay it's not an absolute rule but generally speaking under 20% is typically pretty competitive. Often under 25% can be considered 'good' but that's a bit more of a minefield as it really depends on the car model and what discounts you could get off list i.e. how 'realistic' the list price is in the first place. A super-inflated list price that people never pay anywhere near might mean that 25% to lease isn't actually that great. So don't be blinded by the stats, just use them as an indicator of deals worth taking a closer look at.
3) The vast majority of cars will cost you more than 20% over 2 years. Again, this is why I say you need to be super non-fussy if you want to play the leasing game [as a means of cheap motoring rather than just a lifestyle choice], you have to be prepared to run a 4x4 for a couple of years, then switch into a small town runabout the next 2 years, then a performance saloon to follow or whatever. Obviously there is a middle ground to be found too whereby you may don't jump on the absolute best bargains but instead look for something cheap-ish that fits within the parameters you are willing to accept from a vehicle.
4) The mega-cheap leases I expect are sometimes fuelled by some external factor like the manufacturer has a surplus, or wants to 'fill the hopper' for the used market in a few years time. So they lease you the car for a couple of years and then have it up on a AUC scheme or whatever. This means for that particular model you are getting a subsidy almost rather than really the lease being used to generate profits in itself.

edit: as a general point there don't seem to be that many bargain leases around at the moment. A few years ago people were filling their boots with Passat Alltrack, Golf R Estate etc.

 

[Mr Jack]

Even then, if you are not fussed about sitting in new metal then it still might not be that great an option compared to buying a used car.

Leasing gets you a modern, reliable, car with full warranty. Used cars can be a complete money pit if you get unlucky. Probably on average, you're right, but leasing is also about reducing risk.

 

[[TW]Fox]

Leasing gets you a modern, reliable, car with full warranty. Used cars can be a complete money pit if you get unlucky. Probably on average, you're right, but leasing is also about reducing risk.

Those things are the result of a new or nearly new car, not leasing. Leasing is just one (expensive) way to obtain a new car. There are others.

The thing to remember is that cars depreciate. Somebody has to pay for this depreciation and that somebody is almost always the end user. There is no magic way to avoid depreciating and leasing certainly isn't a magic way to avoid depreciation. At it's most basic, when you lease a car you are paying for:

a) The expected depreciation over the term of the lease
b) A risk premium to account for a depreciation profile that differs from the forecast
c) The cost of the capital used to purchase the vehicle
d) Some sort of profit margin for the supplier

Yes, a lease company is not paying list price for the car, but it's also not getting the car for free either and you can as a purchaser also access very good discounts off list price.

All things being equal, generally, the cheapest way of driving a brand new car is, in order of overall cost:

1) Purchasing it
2) Hire Purchasing it
3) Personal Contract Plan
4) Leasing
5) Short term hire

Sometimes the odd good deal comes up that changes the mix around, but generally, it's that order.

 

[Mr Jack]

Those things are the result of a new or nearly new car, not leasing. Leasing is just one (expensive) way to obtain a new car. There are others

But this isn't true because you pay value added tax on the total value of the car instead of just on the amount you pay in leasing. That alone can save you thousands. Not to mention that you have to have a hefty amount of money to buy in the first place and are losing the opportunity cost of using that money for something else.

 

[[TW]Fox]

Not to mention that you have to have a hefty amount of money to buy in the first place and are losing the opportunity cost of using that money for something else.

The cost of capital forms part of the total cost. You just need to remember not to ignore it. Typically, it will be lower than any of the other forms of funding the car. Not many people can earn a large return on spare cash in the bank. Plus even if you don't have cash you can borrow at very low rates, or use a finance product with a low APR (Most manufactures offer 0-3% APR on HP or Personal Contract Plan).

Leasing is absolutely brilliant when you can find one of the really good deals, but generally there is no more expensive way of getting a new car than leasing it. So, it's more expensive and less flexible. This is why it's really nothing like as popular as people seem to think - a misconception likely caused by the fact people who use Personal Contract Plan think its 'leasing'.

 

[dlockers]

The risk in a PCP is balanced too, because the future depreciation is a known value. You can also buy yourself out of a PCP so it has a lot more flexibility compared to PCH or pure leasing where it is likely to be a bit trickier to understand.

Basically, OP, do your home work. A nearly-new on dealer finance is almost always a bad deal as you can get your own money cheaper elsewhere; or you can get a new car on their manufacturer backed finance (normally cheaper than you get privately).

A PCP on a new can become a cash sale at a point in time you chose, so often makes a lot of sense for people not wanting to outlay all the cash upfront. Especially if you don't want to get stuck in the PCH cycle and end up without a car when you have to return it to the lease company.

What car or car class are you looking at?

 

[HangTime]

Leasing gets you reliability and warranty but it also costs more than a used car (and as mentioned those can also come from outright purchase). So a car you can get nearly new might cost a lot less in depreciation than a leased equivalent. Only the buyer can weigh up the cost savings vs peace of mind / risk appetite but I consider both options valid in the right circumstances.

 

[jaybee]

Basically can you afford to pay the 2 year total cost just to be driving a new shiny car, and then do it again every 2 years (if you take 2 year lease deals).

Say you bought a new car worth 30k on finance and then sold it after 6 years. It may have depreciated by over 50% and only be worth say 14k. So your 6 year ownership cost you 16k (+ interest and service/fix costs outside of any warranty).

But then if you had leased a new one every 2 years paying 6k each time, that's cost you 18k, but you had a new car and all faults were rectified free under extensive warranty.

It can then swing more in favour of leasing or buying on finance new depending on car and deal. The best value for money tends to be to buy a 2 year old car that has taken a large proportion of it's devaluation in those first 2 years, and of which still comes with a manufacturers warranty. But then, warranties tend to be poor.


I don't ever have to worry about this as I can't every justify buying anywhere near to a "new" car. I usually start ten years back lol

 

[HangTime]

I know you're looking at made up numbers and it may not impact the overall point you are trying to make, but there's no way a normal £30k car is still worth £14k after 6 years unless it's a collectors item or something. If it's worth £10k you've done very well. Conversely if you're able to land 3 leases on £30k motors for £6k a pop that's also pretty good going at the magic 20% mark, there's a risk you'd struggle to get the 2nd or 3rd one on a sort of vehicle you'd be happy with.

 

[Greebo]

There's a couple things to state here:

1) Remember that most people shouldn't be paying list for a new car anyway. So a car may lose 50% over 3years compared to list price but you would rarely pay full price in the first place, you would typically go via a broker, use a manufacturer discount scheme or whatever. So you may have only paid perhaps 80% of the list price if you bought outright anyway and hence the depreciation to you as first buyer is actually less than it appears at first glance as 20% of it is covered by the seller. Some cars like Tesla etc are harder to achieve discounts off list on, but then they rarely have cheap leases either, so it's a bit of a moot point.
2) 20% over 2 years IS low - that's kind of the whole point of why people target it as a rule of thumb when looking for a 'bargain' lease. Because list prices can vary wildly compared to what people actually pay it's not an absolute rule but generally speaking under 20% is typically pretty competitive. Often under 25% can be considered 'good' but that's a bit more of a minefield as it really depends on the car model and what discounts you could get off list i.e. how 'realistic' the list price is in the first place. A super-inflated list price that people never pay anywhere near might mean that 25% to lease isn't actually that great. So don't be blinded by the stats, just use them as an indicator of deals worth taking a closer look at.
3) The vast majority of cars will cost you more than 20% over 2 years. Again, this is why I say you need to be super non-fussy if you want to play the leasing game [as a means of cheap motoring rather than just a lifestyle choice], you have to be prepared to run a 4x4 for a couple of years, then switch into a small town runabout the next 2 years, then a performance saloon to follow or whatever. Obviously there is a middle ground to be found too whereby you may don't jump on the absolute best bargains but instead look for something cheap-ish that fits within the parameters you are willing to accept from a vehicle.
4) The mega-cheap leases I expect are sometimes fuelled by some external factor like the manufacturer has a surplus, or wants to 'fill the hopper' for the used market in a few years time. So they lease you the car for a couple of years and then have it up on a AUC scheme or whatever. This means for that particular model you are getting a subsidy almost rather than really the lease being used to generate profits in itself.

edit: as a general point there don't seem to be that many bargain leases around at the moment. A few years ago people were filling their boots with Passat Alltrack, Golf R Estate etc.

I agree with all of that, and yes anything below 20% is a bargain but why just stick to bargains? Whats wrong with just going the cheapest either way? Why do you have to settle for a small town runabout if you really wanted a 4x4? If leasing isnt competitive when your first lease is up, then buy/pcp/hp your next car. This target of 20% and it must be a bargain seems to be limiting your selection. It would be like saying you will only buy a new car if you can get 25% off the purchase price which might mean you can never own a BMW. And I have also used Manufacturer's discounts to get a lease before. I have dealt direct with a VW garage and VW were offering £5k off the list price of a £45k Touareg, the dealer then gave another £6k discount and £3k cashback to sweeten the deal so the actually cost of the car to the lease company was only £31k and thats what they used to come up with their monthly lease cost. It made it very cheap per month.

I always look at the car I want and get a discounted to buy price and use parkers or autotrader to see what a 3 year old one sells for. 1 minus the other is the total cost of the car. Then look at 3+35 lease prices. Add them up. If its cheaper I go for the lease, if it isnt I then buy.

ANd yes almost all leases have gone up by 10-25% since January so leasing in general isnt as good as it has been,.

Yes some people if they really arent fussed what they drive can just go from super cheap lease deal to the next, its a bit like the old days only booking your summer holiday the night before you fly.

But it seems daft to not look at leases unless they are less than 20-25% of list price. It all depends on the car and how much they depreciate by.

My bosses old sq7 after 3 years was offered £29k part ex against a new one and he had paid £75k for so it had cost him £46k in depreciation alone over the 3 years plus all that money tied up for that time. So when there was a deal that he could lease the new one for £900 per month so £34,200 over the 3 years, that seemed like a bargain compared with owning one again. That lease cost was 45% of list price so way above all your 20% and 25% target ranges but unless he could get Audi to discount more than £11,800 off the price of the new SQ7 then it was the cheaper deal.

I dont see the big issue with just picking the car you want and then picking whichever way of funding it that works out cheapest.

 

[jaybee]

I know you're looking at made up numbers and it may not impact the overall point you are trying to make, but there's no way a normal £30k car is still worth £14k after 6 years unless it's a collectors item or something. If it's worth £10k you've done very well. Conversely if you're able to land 3 leases on £30k motors for £6k a pop that's also pretty good going at the magic 20% mark, there's a risk you'd struggle to get the 2nd or 3rd one on a sort of vehicle you'd be happy with.

Yeah my numbers were plucked badly from thin air apologies. But you get the point.

 

[dlockers]

<snip>

I dont see the big issue with just picking the car you want and then picking whichever way of funding it that works out cheapest.

Luckily this is how the real world works versus the OCUK Motors forum view of the world

 

[SkodaMart]

If the debt is affordable, why would you want to do this? Would you buy a house outright with cash? Or finance a large extension? I'd wager the answer to that, in most cases, would be "unlikely"

Exactly

Yes of course I would have bought my house cash. The reason I didn't was the price exceeded my current funds at the time.
My mortgage is the only debt we have, sadly an unavoidable one.

I dont lease cars, I buy ones I can afford, which means no Golf R's here.

 

[[TW]Fox]

I dont lease cars, I buy ones I can afford, which means no Golf R's here.

I own both my cars too but that doesn't mean I don't understand why finance can be useful and why it's completely ridiculous to say that if you can't pay cash you 'can't afford it'. The fact that you meet the payment every month and it doesn't get repossessed is surely proof enough that it is affordable.

Your view is very much in the minority given something like 90%+ of new car sales are on some sort of finance package.

 

[SkodaMart]

I own both my cars too but that doesn't mean I don't understand why finance can be useful and why it's completely ridiculous to say that if you can't pay cash you 'can't afford it'. The fact that you meet the payment every month and it doesn't get repossessed is surely proof enough that it is affordable.

Depends how you intend to use the vehicle.
It could make sense for me to lease a van to earn money for work.
I just don’t see the attraction of leasing flash cars personally.
Just buy something more affordable in the first place.

 

[Kenai]

Depends how you intend to use the vehicle.
It could make sense for me to lease a van to earn money for work.
I just don’t see the attraction of leasing flash cars personally.
Just buy something more affordable in the first place.

This reads more like a lack of interest in new cars on your part than a reason not to finance them for those who are interested.