Car leasing has grown massively in popularity over the last few years. It’s now become one of the main ways to get your hands on a new car.
Here’s an overview of what you need to know about car leasing.
What is car leasing?
The easiest way to think of a car lease is as a long term rental agreement. You’ll pay a deposit and agree a fixed monthly payment in return for being able to use the car for a specific period of time.
You won’t have to worry about how much value the car loses whilst you use it because you return it to the finance company at the end of your agreement. This can significantly reduce your motoring costs.
How much do you pay with car leasing?
Leasing a car is generally regarded as a more affordable option than just buying a car outright or buying one through a finance agreement like Hire Purchase. It’s cheaper because you’re paying off the depreciation of the car over the period that you lease it for, rather than it’s complete value.
The exact amount that you’ll pay each month will vary between different types of car lease and finance providers. However, with all deals, you’ll pay an initial rental then a fixed monthly fee for a set number of months.
Most lease agreements will give you a surprising amount of choice when it comes to setting your initial rental (the leasing equivalent of a deposit) which ultimately decides the size of your lease payments and how long they run for. Because the total amount you pay is always the same, a larger initial rental translates into smaller monthly payments, whilst smaller initial rental means larger monthly payments.
Types of car leasing
There are three main types of car leasing: Personal Contract Purchase (shortened to PCP), Personal Contract Hire (PCH) and Business Contract Hire (BCH). Here’s a quick summary of each. You can read more about them by following the links.
- Personal Contract Purchase (PCP): At the end of a PCP agreement, you’ll get three options. You can either return the car and walk away from the finance company, you can trade it in and get a new agreement on a new car, or you can pay the balloon payment and become the legal owner of the vehicle.
- Personal Contract Hire (PCH): This is the type of finance that you instantly think of when you hear the phrase car lease. With PCH, you pay a monthly charge in return for the use of a car for a given period of time. You aren’t the actual owner of the car with PCH – you’re just the registered keeper. At the end of the agreement, you give the car back to the company and have the option of getting a new one, on a new contract.
- Business Contract Hire (BCH): Business Contract Hire is basically the same product as Personal Contract Hire, with the main difference being that it’s only applicable to businesses. Your company chooses a company car and provides monthly payments for a particular period of time.At the end of the agreement, you give the car back to the company you leased it from. Simple.
Why get a car lease?
Well, for starters, leasing a car is much more affordable than buying a car outright. This is because you aren’t really paying off the full value of the car.
Why is this important? Well, cars depreciate in value, fast. And we mean fast – we’re talking about a car losing 10% of its value as it is first driven off the forecourt-kind-of-fast. This makes owning a new car a pretty lousy investment, potentially losing you money when you try to sell it.
With a car lease, you’re effectively paying off the depreciation (a big word for loss) in value of the car for how long you have it for, rather than its actual value. This means that the overall monthly payments will be much smaller than if you
Yes, you won’t own the car at the end of the agreement, but you’ll also benefit from superb access to some of the latest, high-spec cars that you might not be able to afford without finance anyway.
What you should think about when getting a car lease
There are a few things you need to think about before getting tied into any lease agreement to make sure that you get the best possible deal. Here are a few questions you should ask yourself when you’re thinking about getting a car lease:
#1 — Your current budget and available cash each month
You’ll need to think carefully about how healthy your current budget is and how much money you have coming in each monthly. This will help you when it comes to deciding how much of a deposit to put down and how long you want the monthly payments to last. Making a list of all of your income and your outgoings will help you to work out how much you could stretch
#2 —How long you want to have the car for
Another important thing to bear in mind is how long you actually want the car for. If you’re happy to have a car for a couple of years, leasing is probably for you. If you’d rather have a car for a longer period of time though, you might be better off trying to buy one.
#3 — How far you travel each month
Be sure to ask yourself the question of how much you use your car in a month, or risk getting a nasty surprise at the end of your lease agreement – there’s often a mileage limit with a lot of leases. Be sure to find out what your specific agreement’s limit actually is. If you go over this, be prepared to pay for every mile extra.