Leasing VS Hire Purchase - What's the Difference?

If you're looking at new cars, you're likely looking at two main options for getting them - leasing, otherwise known as contract hire, or hire purchase. What's the difference between the two, and how do you decide which is right for you?

First, what actually are they?

To start with, what do hire purchase and contract hire actually mean? With hire purchase, the ultimate aim is that you will own the vehicle you've chosen. You're basically taking out a loan on that vehicle and paying it off monthly. When it's paid off, the vehicle is yours. There are some more complicated details to consider, but that's hire purchase in a nutshell. With a lease agreement, however, you will not own the vehicle. You're paying for the privilege of using that vehicle and often its ongoing maintenance via your monthly payments. When the payment term comes to an end, you give the vehicle back; it's never truly "yours".

How are the two options similar?

Despite being different, there are some similarities between leasing and HP deals.

Regular monthly payments

Both finance options will see you committing to a monthly repayment figure. Leasing and hire purchase deals are usually solidified with your finances in mind, so when you see figures advertised, they may not actually be what you pay. For example, if you're able to pay a higher deposit on a hire purchase contract, you may be able to get lower monthly payments than were initially advertised. Lease deals tend to be a little more structured, but there is still the option to make the payments lower by removing certain elements from the contract, such as servicing and maintenance provisions. Either way, you will have a regular monthly payment that's relatively easy to work your finances around.

Lack of practical ownership

With a lease deal, you will not own the vehicle you're using. The thing is that with a hire purchase deal, you won't own it either until you have paid off the last payment and the vehicle has been signed over to you. In both cases, you're the owner in practice, namely, you're the one driving the vehicle and treating it as if it were your own, but the actual owner of the vehicle will still be the finance company.

Option for servicing packages

Both lease and HP deals can come with additional packages to make the vehicle ownership experience less stressful. This can often include things like breakdown cover, courtesy car arrangement, and ongoing maintenance or servicing costs. It's important to check during your contract development process what is actually included and what might carry an extra cost. With lease deals, for example, it's often the case that routine servicing is included within the monthly lease payment. Similarly, certain providers may often offer a period of free servicing as an incentive with HP deals. In both cases, your monthly payment will be for more than just the simple use of the vehicle.

What are their differences?

Though similar in some ways, the two options do have some key differences to consider.

Purchase options & VAT

Arguably the main difference between the two options is that at the end of your HP contract, you'll have the option to buy the vehicle. With a lease deal, you simply send it back or negotiate a new deal to keep the vehicle for longer, and there is no option to purchase. Sometimes you might be able to renegotiate your HP contract if there is still a balance owed on the vehicle and you want to keep it. You can also pay this in one go, which is usually called the "balloon payment". Often, the full VAT that's payable on the asset's "hire" needs to be paid at the outset of the contract, which is something to consider for all businesses taking out contracts, but particularly those which are VAT exempt.

Consequences of depreciation

A vehicle will depreciate regardless of who owns it and how it's paid for. The difference is that a lessee does not own the asset, so the depreciation will have no impact on their financial records. It will remain on that of the company that actually owns the vehicle, which is usually the finance company. With a hire purchase agreement, however, the opposite is true, because once the contract has been completed, the asset will become the property of the person who has been paying for it. That means they will have to deal with the financial consequences of any loss in value through depreciation.

Is one better than the other?

The simple answer is no, but due to their differences, one may be preferable over the other, depending on your circumstances.

The key benefits of leasing

One of the main benefits leasing offers is that it's far more flexible than hire purchase. This makes it an ideal choice for both private and business users who don't necessarily want to commit to long-term use of a vehicle. Essentially, you can pay to use the vehicle for as long as it's useful to you, then give it back and wash your hands of it when you don't need or want it anymore. Lease terms can be as little as a week to as long as five years. If you have a lease agreement that includes servicing and maintenance provisions, it'll also be much easier for you to budget over the long term. This is because the costs involved in using the vehicle are a known and consistent quantity. There may be exceptions for unexpected damage or misuse, but in the course of normal driving, the servicing costs and even ongoing maintenance costs could be covered by that monthly lease payment.

The downsides of leasing

The primary downside of leasing is actually tied into its main benefit, namely that you won't own the vehicle you're paying for. If the ability to own the vehicle matters to you, there likely won't be an option to buy it. This can be challenging if you find the vehicle particularly useful, or happen to bond with it during your period of usership.

The benefits of hire purchase

The key benefit of hire purchase is that you're essentially paying for the vehicle with a view to owning it. This can be a more affordable path to owning a newer and better vehicle. Your monthly payments will be gradually paying off the vehicle, rather than simply being a cost for the privilege of using it. As the value comes down and your HP term ends, you may be able to get a much better deal renegotiating on the depreciated vehicle you already have if you want to keep it. Another benefit is that you can often order a specific vehicle new if you want it. When you're leasing, you will often have to choose only from the available stock the lease company has available. This can also help you to make sure you're getting the vehicle you really want.

The downsides of hire purchase

The negative element of hire purchase is that you're ultimately buying a depreciating asset. When you're done paying for the vehicle, it can be yours, but it won't be worth a fraction of what it was when new, or indeed what you have paid for it. Something else to consider is that not all HP deals come with servicing and maintenance packages, so you will often have to cover those bills yourself. This may not be such an issue when the vehicle is new, but as it gets older and faults develop or parts need replacement, you may find it a more expensive overall ownership prospect. You may also have difficulty covering the final "balloon payment" if you want to make the vehicle your own, as this can often be a steep charge.

Making the right choice for you

Now you know the basics of hire purchase and contract hire (leasing), you're able to make the best decision for you about the right option to finance your next vehicle. One is not better than the other, but one may better suit your current circumstances, your budget, and what you require from your vehicle.