Leasing Explained

Car Leasing Explained

Car leasing has long been a popular option for anyone who wants to drive a new car. It has many differences from other types of car financing, and here we look at what car leasing is and why you might want to consider it.

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Overview of Car Leasing

The best way to think about car leasing is like renting a vehicle. When you rent a car on holiday, you pay a set price per day depending on the model of car and various factors. You then return the car at the end of the holiday when the contract ends.


Leasing is similar in that you pay a set monthly fee to drive a new car for a set period of time, and you then return the car once the period comes to an end. You don’t get the option to buy it, and you simply hand it back and the contract is over.


Leasing is sometimes called personal contract hire (PCH) or business contract hire (BCH). These are both very similar, and they simply refer to whether an individual or a business is leasing the vehicle or vehicles.


How Car Leasing Works

When you lease a car (typically a new car) the cost of the contract is essentially split up into equal monthly payments. The length of the contract varies, but it usually lasts from two years to four years.


In most instances you will normally pay an upfront cost in the first month, unless you opt for a No Deposit leasing option and you will then pay a set amount every month for the remainder of the contract. 


You will usually see deals referred to as one number followed by another larger number, such as ‘9 + 35’.


This means an initial payment of nine months followed by 35 monthly payments. In total, this contract would last for 36 months.


You will usually have a lot of choice when you choose a car to lease. This includes the make and model as well as all the specifications. You will get a contract that is tailored for this specific model as well as your estimated mileage, the length of the contract and the structure of the payments – so there is a lot of flexibility involved.


The cost of the leasing contract will also depend on the value of the vehicle at the end of the contract period, called the residual value.


Benefits of Leasing a Car

If you want to drive a brand-new car, leasing is often the most affordable way to do so. This is especially true if you lease one of the more expensive car models. This is one of the main reasons why people choose to lease a car instead of buying one.


Leasing is also suitable for anyone who wants to change cars frequently. If you want to change to another new car every few years, leasing provides you with one of the simplest and most affordable ways to do this.


You will also avoid the hassle of selling your car when you want to get a new model. You won’t have to concern yourself with how much your car has depreciated in value, and there is no need to negotiate with dealerships over the value of the vehicle. You simply hand back your car and the contract is over.


And because you are leasing a new vehicle for a short period of time, it will usually stay within the manufacturer’s warranty period. So if there are any problems with the car, they should be covered without you having to spend any more.


You may also find that other things are included such as road tax, servicing and breakdown cover. Or you can easily add a maintenance package if it is not covered by the leasing company.


Finally, leasing a car is a very simple process. You know exactly how much you are paying each month, there are no hidden extras and you simply hand back the car at the end.


Potential Issues with Leasing

Despite the many benefits of leasing, there are some things that you should be aware of. For example, leasing may not always be the best option for long-term solutions. If you want to keep driving a specific car for longer than a few years, then it may be worth looking at other options.


Leasing also has less flexibility compared to some other finance agreements. For example, with PCP, if your circumstances change before the final payment, you can terminate the agreement voluntarily if you have paid back 50 per cent or more of the total, saving money. But this is not an option with leasing.


If you want the control of owning the vehicle, then leasing is not for you either because the car will always remain the property of the leasing company.


Returning the Car

When you return the car at the end of the leasing period, there are usually certain requirements that you have to meet.


One of these is mileage. You will have arranged a maximum mileage when you took out the contract, and if you have gone over this then you will usually have to pay a penalty charge. This should all be clearly explained, and it will usually work out as a set amount per mile.


If your vehicle is found to have excessive wear and tear, you may also have to pay a charge because it lowers the value of the car.


Other Considerations when Leasing a Car

There are some other things to be aware of when you lease a car:


Cars are usually delivered free to your address in the UK.

The warranty only covers for unexpected failures, and you should still service it in line with the recommendations from the manufacturer.

Road tax is usually included in the cost of the lease agreement.

You will need to get your car insured just like you would any other vehicle.

If you arrange for a longer leasing period, this usually leads to lower monthly payments.

You may be able to get a no-deposit lease where all the monthly payments are the same amount, including the first payment.

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Consider Leasing a Vehicle

Leasing can be an excellent option for individuals and businesses. If you want to drive a new car while paying fixed monthly instalments and without the hassle that comes with buying a vehicle, you may want to consider leasing.