Let's say you want to choose a new car. The new Mercedes C-Class is supposed to be good, should you go for that? Yeah, why not! Next, you've got to decide which finance option best fits your car budget. Hire purchase is expensive and since you don't really need the option to purchase the car, PCP seems a bit unnecessary. That leaves car leasing.
Now, we've already looked at the upfront fees with car leasing but what about the regular monthly payments? Here are some more details about what it is and how it’s calculated.
What is the car leasing monthly fee?
With car leasing, you make a regular payment for a set number of months. The value of the payment and the duration of the contract are set and agreed before the start lease.
It might also have additional fees for an optional extras you chose like maintenance packages and admin charges, which are often wrapped up into the overall payment too so it’s best to check the small print of your terms to find out for sure.
Why car leasing monthly fees make sense
A car loses value incredibly quickly – up to around 40% in its first year. That means it’s not the wisest investment to make if you’re looking to resell it, as you will lose a chunk of money.
For a lot of people, that makes owning a car an unattractive option. The hassle of stumping up a lot of money for an asset that loses almost half its value in a matter of months is a big turn off for most people – and that’s not even considering running costs and repairs.
But with a lease, you don’t own the car and so these monthly payments don’t go towards paying off the value of the car. Instead, they reflect the depreciation in value that your car experiences whilst you use it. This means that the overall monthly payments, and the lease itself, is often cheaper than other types of car finance, like Hire Purchase. Ker-ching.
How is the car leasing monthly fee calculated?
The leasing monthly fee is calculated by bearing three things in mind:
# 1 — Depreciation of your car’s value
Car lease payments are based on how much value your car loses, as opposed to how much value it’s worth when you buy it, along with factors like the length of your agreement and how much you put down as the initial fee.
#2 — VAT
Taxes are one of the only constants in life and I’m afraid to say that car leasing isn’t immune to them. Your monthly fee will have VAT added on top of it. At the time of writing, VAT in the UK is 20%.
#3 — Initial rental
How large or small an initial rental you put down at the start of the agreement will affect how big your monthly payment. A larger initial rental will generally translate into smaller monthly fee whereas a smaller initial rental will usually mean a larger overall monthly fee.