What is car leasing?

What is car leasing?

One of the cheapest ways of driving a brand-new car, leasing is effectively a contract for a long-term vehicle rental.

There are several ways of putting a brand-new car on your driveway, but one of the simplest and cheapest is to lease it.

While various forms of car finance such as PCP and hire purchase see you buy the car (or at least give you the option to buy), leasing is essentially a long-term rental contract. You pay an initial fee, then monthly payments, and you get the car for an agreed period of time. At the end of that time, you hand the car back, with no option to buy it. There are also leasing options available for used cars, although they’re not as common.

At its heart, leasing is very straightforward, and if you’ve got no desire to own a car and just want to pay the lowest amount possible each month, leasing could be just what you need.

Car leasing: Pros and Cons

Pros of car leasing

• Low monthly payments for the latest cars
• No worries about depreciation and future values
• Simple and straightforward

Cons of car leasing

• Limited mileage rules
• No option to own the car
• Mainly for new cars

How does car leasing work?

The principle of car leasing is simple – you pay an agreed amount of money to hire a car for an agreed amount of time, with a set mileage cap. The overall cost is usually split between an initial payment, which can vary in size, and then a number of equal monthly payments.

At the end of the agreed time, you hand the vehicle back with nothing else to pay, save for any damage or excess mileage charges. Unlike PCP finance, there’s no option to buy the car.

As a general rule, you’ll pay more for a lease the higher mileage you do, because cars with more miles on them are worth less to the leasing company when they get them back. Accordingly, you’ll likely be charged an excess mileage fee if you go over the agreed limit. This is usually between 5p and 10p per mile, but sometimes more. There could also be charges if the car is damaged beyond normal wear and tear standards. These standards, by the way, are generally in accordance with guidance from the British Vehicle Rental and Leasing Association (BVRLA), and will have been explained to you at the start of the contract.

What are the cheapest lease deals?

There’s a certain science in what makes cheap lease deals, and they can vary over time even on the same car. The cost is determined by a variety of factors, including the cost of the car, the expected depreciation and even the state of the economy at the time of leasing. 

As a general rule, the cheapest deals are available on the least expensive cars, but that’s not always the case – cars that hold their value well can also have very attractive rates, because the leasing company can be confident they’ll get more money back when they sell them after the leasing period. That means that you can often find good deals on cars that, on the face of it, are more expensive.

You’ll likely get a cheaper deal for covering fewer miles, as a low-mileage car will be worth more at the end of the agreement. Changing the length of the deal will usually affect the monthly payments too, although the effect varies depending on the vehicle and how quickly it loses value. Sometimes you’ll pay less per month for a longer agreement – four years, for example – but at other times a shorter, two-year deal will be the most affordable option. Making a larger initial payment will also drop the monthly costs.

Which finance method is best? PCP vs HP vs Leasing

It’s important to note that leasing a car doesn’t count as finance – you’re paying simply to hire the car, not borrowing money towards buying it. If you want to own the car, or at least have the option of owning it, then PCP finance or hire purchase (HP) might be a better option for you..

If you don’t plan to keep the car at the end of your finance contract, then leasing is likely to offer the most affordable monthly payments, but you won’t have any option to own the car – you’re essentially renting it, and you hand it back at the end. Keep in mind that it’s likely harder and more expensive to end your contract early than with PCP or Hire Purchase

If you’re set on owning the car at the end of the contract, HP is likely the most affordable method overall, because you’ll pay off the balance of its value faster and therefore pay less interest. However, monthly payments will be bigger than with PCP, as you’re paying for the whole purchase price, not just the depreciation.

PCP is sort of a halfway house. If you hand the car back at the end of the contract then that’s the end of it, but unlike leasing you have the option of a final payment to own the car. This is set out at the start of the contract and is based on the expected value of the car. While nothing is guaranteed, the actual value of the car at the end of the contract could be higher – should you choose to hand the car back, you can use any extra value of the car over the remaining finance balance to put towards the deposit for your next car, which could reduce your monthly payments.

With both PCP and leasing you have to keep within a set mileage to avoid extra charges at the end of the contract. If there’s any damage to the car (other than wear and tear), you’ll have to pay a charge for that, too. The details of what’s acceptable will be outlined at the start of your agreement.

When comparing PCP and HP deals, remember to include the cost of the optional final PCP payment in your calculations.