There is a lot to consider when getting your next car. A large portion of people still have the colour of the car they drive as a big factor when choosing their next car. This may seem trivial but if you are paying for something for the next few years, you may as well have exactly what you want. Something less trivial is the conundrum of buying or leasing your next car so let’s break down what that means to help you understand the options.
Finance options have grown in the last 25 years starting with the move away from what we call straight line HP (deposit of 10-20% typically followed by 80% divided by up to 48 months) to PCP (unequal payments with 36 or 48 payments followed by the choice to pay the balance (around 40% of the original cost) or return the car to the lender. Now with Personal Contract Hire, the choices are even wider and this is to help soften the blow of cars becoming more vital to everyday life and a larger expense in relation to the average wage.
Firstly the major choices of finance are summarised as PCH (Leasing) PCP (Personal Contract Purchase) or Hire Purchase (HP). These are given lots of other names in the marketplace but they fall into two categories decided by this question; at the end of the day are you paying towards owning the car, or simply a fee for using the car.
If you are the type of person who looks forward to the day the car is paid off so you can trade it in and start again, you may think that really, there is no difference. Only if you consider the car as an asset, would this comfort be removed by switching to leasing. One of the less obvious benefits of leasing a car is that you aren’t worrying about the future value of the car being dropped significantly for reasons out of your control. Good examples of this are when Saab left the marketplace, people with an option to purchase agreement primarily let the finance companies have the car back. The biggest loser in terms of PCP would be the diesel Volkswagen cars form a few years ago when the whole scandal about emissions cheating came to the forefront.
The other factor to consider is if you’re usually buying cars with equal instalments, and no balloon payment (optional or otherwise) at the end of the term, and you change to PCH you may be no worse off but you will have nothing to show for your expenditure next time around.
Personally, I decide how to fund my next car like this: Is it likely to lose a lot of money or get a bad reputation as a used car? If yes, go straight to PCH, pass Go and collect 200 smartie pants point. Is it likely to have a lot of competition in 3 yrs time because it is a popular choice car? Go straight to PCP and see what the marketplace is like, safe in the knowledge that you have the option to give it to the lender if making a net cash return is less than likely. And finally, is the car one you know will relatively hold its value, or could you pay it off over 5 years as opposed to leasing it over 3 and does it have a good reputation? Then use HP and wait to see the return whilst driving a car you have equity. The bigger question is how do you know any of these things, and the long answer involves research and understanding the future residual marketplace plus economic factors relative to the used car industry along with key external factors. The short answer is talk to Kappa.