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What’s the difference between a car lease and a hire purchase?

What’s the difference between a car lease and a hire purchase?

Owning a car brings a sense of freedom and flexibility. Once you’ve decided you need one, the next step is to arrange for the funds to buy it. If you don’t have the cash to buy a car outright, you may look at car leases or a hire purchase. Let’s look at how each of these work. 

What’s the difference between a car lease and a hire purchase?

Car Lease

A car lease refers to a long-term rental agreement with the vehicle owner. You can use the car in exchange for a fixed monthly payment. For the entire time that you lease the vehicle, legal rights over it remain with the lessor.

When you lease a car, you will generally need to pay an up-front cost of the car’s first-month rental along with registration fee, stamp duty, and any other expenses. The lease term is typically between three and five years, and at the end of the term, you need to return the car to the car lessor. During the entire lease term, you are liable for the maintenance.

If you plan to buy the car you are using, you often need to pay the difference between the market price and residual value. 

In a car lease, the lessor may impose a limit on the number of kilometres you can drive. For instance, 35,000 kilometres a year. If you exceed the given kilometres, you may have to pay extra when returning the vehicle.

Hire purchase

If you want to actually own the car instead, you may consider a hire purchase. You enter into an agreement with the financier to pay installments over time and in return, get ownership of the car. You will be paying the total cost of the vehicle in instalments over a certain period, typically one to five years. The car may be new or used.

You will likely need to pay an amount upfront as a non-refundable deposit. The monthly instalments you pay will include the principal amount and interest. You may have an option to pay lower monthly instalments and a balloon payment at the end of the arrangement.

Car lease vs hire purchase 

The above information may leave you asking “should I lease or hire purchase?” This depends on what you want to do with the car. For example, do you want to use it for a long or a short time?

It comes down to personal preference, but a car lease may work better for those who only need a vehicle for a fixed period or want the flexibility to upgrade, while a hire purchase may work for those who wish to own a car, but do not have enough money to pay the entire amount in one go. With a hire purchase, you have an option to pay an upfront amount, which is typically about 10 per cent of the vehicle’s total value. You can pay the balance amount in monthly instalments. With a car lease, the cost of your rental payments will depend on how long you choose to rent the vehicle.

Additionally, a hire purchase may allow the owner to claim the depreciation of the vehicle purchase price and interest.

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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