Everything you need to know about car leasing

Small deposits, cheap monthly payments and a brand new car — is car leasing really the perfect financing option?

Car leasing (technically called Personal Contract Hire or PCH) is a pretty unknown alternative to popular car finance options like Personal Contract Purchase and Hire Purchase.

In this guide, I'll break down the basics of car leasing to help you work out whether it's the right option for you.

What is car leasing?

Car leasing is an agreement between you and a leasing broker that allows you to drive a brand new car for a set period of time.

In exchange, you pay a small initial rental then make regular monthly payments. At the end of the lease, you return the car to the dealer and you both go your separate ways.

  • Initial Payment: Leases are usually offered with an initial rental charge of 3, 6, 9 or 12 times the monthly rental.
  • Monthly Payments: Your monthly payments are based on the residual value of the car after the leasing term and the amount you paid in your initial payment.

Do I ever own the car?

In short, no. With leasing, the car is always owned by the company that supplies the deal.

You’ll park it outside your house, you’ll drive it to work and you’ll spend hours buffing the bodywork to a faultless finish. It’ll feel like your car but it’s not.

So, if you want to own your car and pass it onto your kids so they can learn to drive, car leasing probably isn’t for you.

However, not owning your car comes with more than a few benefits, which you might not have thought about.

First, there’s no reason to think about resale value! Your payments are set at the start of the lease so, even if the car suddenly drops in value, it’s the finance company that has to absorb the loss and not you.

Second, because lease cars are new you’re usually covered by the manufacturer’s warranty. If something does go wrong, it’s very rare that you have to pay for it. Just ring your leasing company and tell them to get it fixed.

Finally, you get a brand new car every few years! Call it indulgent if you want but there's nothing better than picking out a new car every two or three years.

What happens at the end of a car leasing contract?

Car leasing deals are basically long-term rentals so when your contract comes to an end you hand the car back and walk away.

Before your contract ends, your leasing company will arrange a day to return the car and, on that day, they’ll check its mileage and condition.

If the car is under the estimated mileage and in good condition, you won’t have to pay anything else.

If you’ve gone over the mileage or have damaged the car, you might have to stump up some extra cash. Which brings us onto...

Does car leasing have extra charges?

If you stick to all the rules, you shouldn’t have any extra charges when you get to the end of your deal.

However, there are a couple of common extra charges and it’s not uncommon to hear about motorists being hit by one or more of them.

Excess mileage

Before you sign your lease deal, you’ll have to estimate how far you will drive the car each year. This estimate allows the dealer to more accurately estimate the residual value of the car after your lease finishes.

If you go over that mileage, you’ll have to pay to make up the loss in value. Dealers will charge around 7-10p for every mile over your initial estimate.

Damage charges

Just like with a hire car, you are liable for any damage done to the vehicle. You’ll get away with normal wear and tear like scuff marks because it's classified as wear and tear but you’ll need to pay for bigger dents, scratches and breakages to return the car to saleable condition.

Is car leasing for me?

Okay, so that's your crash course to car leasing. All set to find a local dealer and lease your next car?

If you're still not decided whether leasing is for you, here's a super condensed list of pros and cons to help you make up your mind.

Benefits

  • You get a brand new car
  • It’s cheaper than PCP
  • You know exactly how much you’ll pay over the contract
  • You don’t have to worry about the resale value of the car
  • You can often afford a nicer car than on other finance
  • Repairs and maintenance are rare because the cars are new
  • Dealers will often cover vehicle maintenance and road tax

Drawbacks

  • You never actually own the car.
  • Extra payments can unexpectedly increase the final bill.
  • You will have to pay for any damage not classed as wear and tear.
  • You are locked into a contract for the full term
  • Early termination charges can be high.
  • You must buy fully comprehensive insurance.