Car leasing explained – your complete guide to leasing a car
Car leasing is increasingly becoming the most popular way for UK drivers to have a new or nearly-new car, with more than a million cars bought on lease or finance deals in the past year. If you want to know more about leasing a car, read our guide below..
When you’re looking for a new car there are a lot of decisions you have to make. As well as actually what car you want to have, you also need to think about how you are going to buy it. Can you afford to buy it outright with cash, or would it be better to get it on a finance deal?
There’s also the option to lease the vehicle for a fixed period of time rather than buying one. Leasing has become a popular option for UK motorists looking for their next car, but it can be a complicated subject when you first start researching.
There’s a lot of jargon (PCP vs PCH etc.) and a lot to think about in terms of how much the overall lease will cost and whether it works out as the best deal for you or not. There can also be some restrictions involved when you lease a car, so it’s important to understand how it all works…
- How does leasing a car work?
- Is it better to lease or buy a car?
- How much does it cost to lease a car?
- Leasing options (PCP vs PCH)
- Used / second hand car leasing
How does leasing a car work?
Car leasing is easier to understand if you think of it as a long-term car rental. You agree to pay a certain amount of money each month to have the car for an agreed period and mileage. Car lease deals typically last for between 2-4 years, and the mileage restrictions usually start at 8,000 miles per year.
As well as a monthly fee, you will also have to pay an initial payment to the leasing company. This works as a kind of a deposit as it is deducted from the full lease amount – so the higher the initial payment the lower the monthly payments.
You will typically have the choice to pay 3, 6, 9 or 12 months lease up front as an initial payment, so you have the flexibility of putting down as much or little as you can afford.
There are generally five steps to the car leasing process:
- Choose the car you want to lease
- Provide financial details and pass a credit check
- Take delivery of the car
- Use and maintain the car as per the lease agreement
- Return the car at the end of the lease period
Is it better to lease or buy a car?
It can work out cheaper to lease than buy, but this usually depends on what the resale value of the car is.
If you cannot afford to buy the car outright, then as long as you can afford to pay the initial payment and the monthly lease fee than leasing is your best bet to having a new car.
If you can afford to buy the car but want to know if leasing will work out a cheaper option or not, then you need to take into account the full cost of the lease and whether – at the end of your lease term – you would be better off than if you bought the car outright and then sold it.
There are a lot of different factors at work influencing whether it works out cheaper to lease or buy a car, including the number of miles you drive, how long you lease the car for, and how well the car retains its value.
As an example, Which? recently ran an analysis of specific models and found that a Ford Mondeo was typically worth only 36% of its initial value after three years, whereas a VW Scirocco retained 63% of its original value.
Therefore their analysis suggested that most drivers would be better off leasing a Mondeo, but buying a VW Scirocco on finance.
The general rule is that, if a car retains it value well then you will probably be better off financially if you buy it. After three years you will therefore have a reasonably valuable asset that you can sell on, whereas if you lease a car for three years you have nothing.
If the car model you want is one that typically falls dramatically in value, then you will likely find it is cheaper to lease it as you then won’t have to carry the depreciation.
How much does it cost to lease a car?
How much a car lease will cost depends on a number of factors. The make and model of the car you want to lease, how long you want to lease it for, what annual mileage you want to drive and how much initial payment you can afford to pay will all influence the total lease cost.
For instance, if you want to lease a luxury saloon like a BMW or Mercedes then it is going to cost you more than if you are leasing a small hatchback.
Similarly, a one year lease will cost more than a two year lease, which will cost more than a three year lease and so on. If you need the car to drive 20,000 miles per year, then it will cost you more than if you only need 10,000 miles.
Different lease companies will offer different prices and deals on certain models, so it’s important to shop around and find the best car lease deal for you.
As a quick guide, after searching online we found the following top car lease deals:
Fiat 500 Hatchback – 48 month lease – 5,000 miles per year
Initial payment: £1,079.89 + VAT
Monthly cost: £119.99 + VAT
Audi A4 Saloon – 24 month lease – 5,000 miles per year
Initial payment: £1,511.89 + VAT
Monthly cost: £167.99 + VAT
There are lots of car lease comparison websites now that allow you to search and compare the best deals for you, so our advice is to do your research and compare as many as possible to find the cheapest car lease deal.
Leasing options (PCP vs PCH)
There are two main types of car leasing deal – PCP and PCH.
PCP stands for Personal Contract Purchase, which is similar to a Hire Purchase arrangement.
What is Hire Purchase?
If you opt for a Hire Purchase agreement then you will usually pay an initial deposit and then pay off the remaining value of the car in monthly installments. When all the payments have been made the Hire Purchase agreement will end and you will own the car.
The benefits of Hire Purchase include:
- You’ll be able to drive away a car that you may not have been able to afford outright
- There’s no need to estimate your yearly mileage as the payments are purely based on paying off the car
- Once you have paid all the monthly payments and the option to buy fee, you will own the car outright
Things to consider:
- Your monthly payments may be higher than other lease/finance options as you are paying off the value of the car
- You won’t be able to sell the car on until the Hire Purchase is settled, and you won’t own it until all the payments have been made
- You need to keep the car properly maintained and insured while it is in your possession until the value is paid in full
What is Personal Contract Purchase (PCP)?
A Personal Contract Purchase (PCP) agreement is similar to a Hire Purchase in that you will pay an initial deposit and then monthly installments.
The difference is that the monthly payments you make under a PCP go to pay off the depreciation of the car, not its full value. At the end of the PCP term you will have to pay a final ‘balloon’ payment to cover the remaining value of the car if you wish to keep it.
When you start a PCP contract, the lease company will set a Guaranteed Future Value for the car. This determines what the car will be worth at the end of your contract. The monthly installments you then pay will be the difference between what the car is worth when the PCP began and what it will be worth at the end of your contract (plus interest).
This means that you will pay lower monthly payments, but you will need to pay a final amount at the end of the PCP contract if you want to keep the car.
A PCP deal leaves you with three options at the end:
- Buy the car outright by paying the remaining GFV amount
- Give the car back
- Part exchange the car for a new one
What is Personal Contract Hire (PCH)?
Personal Contract Hire is basically a form of long-term rental that suits drivers who do not want to buy the car at the end of the lease term.
You will lease a car for an agreed period of time – 12, 24, 36, 48 months – and pay monthly installments. When you come to the end of the lease, you just return the car.
Benefits of Personal Contract Hire (PCH):
- It’s a hassle-free process where you can get a new car without worrying about depreciation
- A lot of PCH lease companies offer maintenance options so you can avoid repair bills
- The monthly payments are a lot less than if you were buying the car
- PCH gives you access to brand new cars you wouldn’t normally be able to afford to buy
Things to consider:
- You have no option to buy the car at the end of the lease
- You need to set an annual mileage limit, and pay an extra charge if you exceed it
- You will be tied into the full duration of the lease agreement, with significant charges if you need to change or end the contract early
Used car leasing
While most people use leasing options to get their hands on a new car, there is a growing market for people who want to lease used and second hand cars.
The main advantage of leasing a used car is the same as the reason people choose to buy a second hand car rather than a new car – cost.
Used car leases generally run for a shorter period, so you will not be paying as much as you would for longer term leases on a new car. The value of a used car will be lower as well, which means lower monthly lease payments.
Also, it can be more difficult to work out if a used car lease is a better overall deal than a new car lease deal as there are more factors to consider, including:
- Market value of the used car – do your homework and make sure you know how much the car is worth in today’s market
- Mileage – the number of miles on the clock can make a big difference. A car with high mileage is unlikely to be offered a good leasing deal. In terms of what ‘good mileage’ means in leasing terms, it should be 15,000 miles per year or less. So a three year old car should have less than 45,000 miles on the clock to be eligible for a good used car lease deal
- Repair costs – most used cars don’t come with a warranty, so any current problems with the car will be your responsibility to fix