Hire Purchase vs Lease: Which option will suit you best?

If you’re looking for a new car, understanding your finance options is essential to making the right choice. Many put off this decision, choosing an option that doesn’t fully meet their needs.

Hire purchase and leasing are the most popular ways to finance a vehicle. To decide which option is right for you, it’s important to know the key differences between these agreements.

This guide will outline the benefits and drawbacks of each choice, helping you find the best fit for your needs quickly and confidently.

How does Hire Purchase work?

A hire purchase (HP) agreement lets you finance a car by making monthly payments. With HP, you effectively "hire" the car until the final payment, at which point you become its legal owner.

When you take out an HP agreement, you make an initial deposit, typically around 10% of the car’s price, followed by regular monthly payments over one to five years. HP suits those wanting to own a car without paying the full amount upfront.

You only gain full ownership of the car after making all payments. Some agreements may include a small final fee, around £100-£200, to officially transfer ownership to you.

In some cases, dealers offer HP at 0% APR. However, these offers usually require a strong credit history for approval.

How does leasing work?

Leasing a car allows you to drive a vehicle by making monthly payments without ever owning it. With a finance lease, you pay an initial amount—typically lower than with hire purchase—followed by set monthly instalments for a period, usually three or four years.

When you lease, the dealer calculates your monthly payments based on the difference between the car’s price and its expected value at the end of the lease. Your first payment is usually around £1,500 plus VAT, although paying a larger deposit can reduce your monthly cost.

Unlike hire purchase, leasing spreads VAT across each monthly payment. Some finance leases also offer a “balloon payment” option, which allows you to reduce monthly payments by paying a larger final instalment if you choose to keep the car longer.

Hire Purchase vs. Lease: Outlining the differences

Hire Purchase (HP) differs from Financial Lease (FL) in many aspects, including cost and ownership. Let's examine the most significant differences between these car finance options in detail:

Governing accounting standard

Both leases and hire purchase agreements are guided by rules from the International Financial Reporting Standard (IFRS 16), which came out in 2016. This standard ensures that companies offering leasing or hire purchase options follow clear guidelines, so everything’s regulated and transparent.

Down payment

When it comes to monthly payments, the cost is worked out based on the asset's price spread over its useful life. With leasing, you usually pay a lower amount upfront, making it more affordable at the start. In contrast, hire purchase agreements include a larger initial payment because you’re working toward full ownership—covering the car's full cost plus interest.

Ownership rights

If you go with a lease, the car will always belong to the leasing company, meaning you’re essentially renting it. But with hire purchase, you’re on track to own the car outright. After the final payment, the car is yours, making it a great option if long-term ownership is what you’re after.

Maintenance costs

With a standard lease, you’re usually responsible for any repairs and maintenance the asset might need. However, if you choose an operating lease, the lessor takes care of maintenance, so you don’t have to worry about those extra costs. In a hire purchase, all upkeep and repair costs fall to you since you're working toward full ownership.

Duration

Leases work well if you need an expensive asset, like land or a building, for a long time without actually buying it. Hire purchases, on the other hand, are generally shorter-term agreements for less costly items like a car or a piece of equipment.

Depreciation

You can claim depreciation with both options, but the way it’s applied differs. With a lease, the leasing company records the depreciation as an expense on their books. In a hire purchase, you claim depreciation based on your payments toward owning the asset, making it easier to manage if ownership is your end goal.

Taxes

With a lease, you’ll pay VAT on top of your monthly payments, covering the cost of using the car under your lease agreement. In a hire purchase, VAT isn’t added to each monthly instalment, so the structure is a bit different from a lease.

Monthly payments

Hire purchase usually comes with higher monthly payments than a lease because you’re paying toward full ownership of the car. Owning the car at the end is a big plus, but it’s important to consider not just the vehicle’s price but also the interest rate. Opting for a longer plan will lower your monthly payments, though you’ll pay more in interest overall. And don’t forget to factor in extra expenses like running and maintenance costs.

With hire purchase, you also have the option to buy a used car, which can really cut down the overall cost. Leasing, on the other hand, is typically only available for new cars.

However, the lower monthly payments of leasing mean you could drive a high-tech car on a more affordable budget.

Balloon payment

A key advantage of some leasing agreements is the option of a balloon payment. With a balloon, you can lower your monthly payments by agreeing to make a larger, one-time payment near the end of the lease. This structure is based on the car’s projected value, and it often comes with mileage limits. The bigger the balloon payment, the less you pay each month, which sounds like a pretty appealing setup, right? But there are a few downsides to consider: choosing a balloon payment can mean receiving less if you return the car, as this final payment usually comes out of any resale value.

Mileage

It’s tough to predict exactly how many miles you’ll drive in a year—things like unexpected trips can quickly add up. If you estimate a mileage cap of 10,000 miles but only use half, you’ll still be paying for the full amount every month.

Hire purchase offers flexibility here, as it doesn’t require you to set a mileage limit at all. With HP, you can drive as much as you need without worrying about extra fees for going over a set mileage.

Leases, on the other hand, do require you to set an annual mileage cap, typically between 8,000 and 30,000 miles. Some high-mileage lease options allow for over 50,000 miles a year, but there’s always a cap. If you tend to drive a lot and think you might exceed this limit, leasing might not be the best choice due to potential extra charges for additional miles.

The extent of financing

Leasing is often considered full financing since you don’t usually need to make an upfront payment. Hire purchase, however, requires an initial deposit, making it more of a partial financing option. This upfront cost can be substantial, so it’s worth factoring into your budget if you’re considering HP.

Early termination

With hire purchase, if you’ve paid over half of the total amount, you can return the car to the lender and stop paying the remaining instalments. This option, known as “Voluntary Termination,” can be a helpful way to end the agreement early if your circumstances change.

For a lease, early termination is also possible, but it often costs more than the remaining balance of the contract. To avoid these extra fees, it’s a good idea to choose your contract length carefully from the start.

Hire Purchase vs. Lease: Advantages and disadvantages

We have already specified the major differences between a hire purchase and a financial lease. Before we proceed to their similarities (and they do share some), let's quickly look at their specific pros and cons.

Hire Purchase: Pros and cons

In a nutshell, a hire purchase option will ideally suit those who dream about owning their own car. However, it's sometimes considered a drawback, as you are fully liable for the vehicle when the final payment is made.

Leasing: Pros and cons

Finance leases offer flexibility, but you can never own the leased vehicle as it belongs to the finance company you have signed a contract with.

Similarities

While hire purchase (HP) and financial lease (FL) have their differences, they also share some key features. Let’s take a closer look.

Fixed periodical payments

Both hire purchase and financial lease agreements require regular, fixed payments to the lender. For smaller items, like cars or electronics, these payments are usually made monthly. However, for more valuable assets, payments may be scheduled quarterly or even annually. Both HP and FL contracts are set for a specific period, agreed upon from the start.

Practical ownership rights

Both options provide what’s called “practical ownership.” With a financial lease, you have exclusive use of the item throughout the lease term, though you don’t own it. You’re essentially paying to use it for an agreed period. With hire purchase, you also make regular payments, but you have the option to buy the asset at the end of the contract. In this sense, HP is a “rent-to-own” deal, while FL is more of a “pay-to-borrow” arrangement. In both cases, you have control over the asset during the contract, but you’re not allowed to sell it, regardless of the type of agreement.

What works out better: HP or Leasing?

Leasing can be summed up in one word—"flexibility." It gives both businesses and individuals the freedom to choose an asset that fits their budget without the commitment of ownership. With leasing, you get to use the item for as long as it’s useful, paying only for the period it benefits your business or lifestyle. When the contract ends, you can easily upgrade to a new model or walk away without worrying about what to do with an outdated item or dealing with warranty issues—that’s all managed by the lessor.

On the other hand, if your goal is to own the asset eventually, hire purchase might be the better choice.

Consider alternatives

While leasing and hire purchase are the most common ways to finance a vehicle, there are other appealing options worth exploring, like PCP (Personal Contract Purchase) or a traditional bank loan.

With a Personal Contract Purchase, you get a flexible option that addresses the ownership issue often associated with leasing. PCP can be ideal if you think you might want to buy the vehicle at the end of the contract. This option allows you to make a final balloon payment, which transfers full ownership of the car to you.

If you’re leaning toward hire purchase, a personal loan could be another option. Similar to HP, a bank loan gives you ownership of the vehicle right away, with the added benefit of allowing for a longer repayment period—sometimes up to seven years. This can be a helpful way to spread out payments if you’re planning on keeping the car long-term.

Summary

Hire purchase and leasing offer excellent ways to access the items you need for a set period without the upfront cost of full ownership. These finance options appeal to both individuals and businesses that want to “hire” or “lease” high-quality equipment or vehicles. It’s easy to see why HP and leasing are popular strategies for those looking to stay up-to-date with the latest technology while working within a budget.