Let me introduce you to two folk who are in the market for a new car.
Lorraine is a busy business owner who prides herself on her professional air. She likes to have the latest and greatest car models to complete the look. She has browsed through used cars, but she knows it can be risky business, with failed MOTs and expensive repair costs looming large. She knows she could lessen the risk by buying new - but unfortunately, like most of us, she doesn’t have tens of thousands of pounds stowed away for a rainy, brand new car day.
Barry is less concerned with aesthetics. His Vauxhall Corsa - which looks like he snatched it from a year 2000 time capsule - has finally bitten the dust. Barry just wants something to get him from A to B. He has a 50 mile driving commute to and from work, and he regularly sets off cross-country to see extended family. He wants something that will support his lengthy road trips for years to come.
One of the most popular options these days is car leasing. After passing a car lease credit check, you pay one upfront fee called an initial rental (like a deposit) and several monthly payments for the duration of your contract, whether it be 1, 2, 3 years or more. Your payments are only covering the cost of depreciation on the car and you’ll never fully own it - you’ll hand it back to the broker at the end of the lease.
Lorraine and Barry have an abundance of personal leasing options at their disposal. One of the most popular leasing plans is Personal Contract Hire (PCH). On the flipside, if Lorraine or Barry want the flexibility to buy their leased vehicle at the end of their contract, they may be more inclined to lean towards a Personal Contract Purchase (PCP) or a lease purchase deal.
If you want to compare PCP vs lease, our guide is sure to clear things up and make you decision a little bit easier.
Another option for Lorraine and Barry would be to look into a Car Hire Purchase. It’s pretty straightforward. Pay a deposit, make monthly payments, and you’ll eventually own the car once all the payments are done. Easy peasy.
These could all be great options for Lorraine and Barry, but they do have their drawbacks.
If you’re in the market for a fresh set of wheels, read on. We’re going to take a deep dive into the pros and cons of leasing a car to see what the right options for Lorraine and Barry are, and for you.
Buy or lease a car? The advantages of leasing.
Leasing is an accessible way for the average earner to drive a brand new car. There are countless advantages to the process. Here they are:
- Affordable payments. Since you’re just paying off the cost of depreciation, your monthly lease payments will, in total, be a lot less than a loan with interest. You’ll be able to afford a really luxurious car which you’d never nab if you had to pay outright, new or used! You can bump down the cost to lease a car using car lease negotiation techniques or following some of other car leasing tips, like the best time to lease a car.
- Manufacturer warranty. New cars come with multi-year manufacturers warranties. Older, used cars are unlikely to be covered. With contract hire, you get a factory fresh model (you can't lease a used car), complete with a lease car warranty which generally covers you for the full car lease length.
- Businesses. When a business purchases a car, it has to be 20% VAT. If they lease a car, they can recover 50% of this VAT. It’s treated as an expense so it can be deducted from the company’s overall profit. If you're more interested in the business side of things, check our guide, "how does business car leasing work?".
- No MOT. Cars only undergo MOT testing when they’re 3 years old and above. If you lease your car for less than 3 years, you don’t need to awkwardly try to read the face of the mechanic who’s scrutinising your precious car.
- Simple payments. Road tax is included in your lease, so that’s one less thing for you to worry about. Some leasing deals also offer breakdown cover, maintenance packages, and occasionally even insurance. This lets you streamline your motoring payments into one tidy sum.
- Depreciation. Cars are terrible investments. They depreciate rapidly, sometimes losing as much as half of their value in only a handful of years. If you're leasing - you don't feel the effects!
Buy or lease a car? The drawbacks of leasing.
While leasing is a great option for some drivers, it's also a not-so-good choice for others. Let’s see if any of these cons would affect you:
- Ownership. When you lease a car, you never truly own it. The leasing company remains the registered keeper of the lease car. Your monthly payments are like paying rent on a flat, rather than towards your mortgage. They are just for short-term use, rather than making an investment.
- Resale. Surely no sane human being actually enjoys the awkward and frustrating experience of selling their car on, but you can make a chunk of money to put towards your next car. When you lease, however, you get nothing back. On the bright side, at least you get to avoid the microscopic inspection of your car by prospective buyers - priceless.
- Mileage. A lease agreement comes with a mileage limit. For example, you might have a limit of 10,000 miles included in the price - anything over this and you’ll have to cough up excess mileage charges. So, if you drive a fair amount, opt for a high mileage lease.
- Return charges. If you're ending a car lease early, you have to pay early termination fees. If there’s any damage to the car when you hand it back, you will have to pay the lease car repair bills. This can be a fair whack of money. 'Fair wear and tear' is allowed, in line with BVRLA guidelines.
- No customisation. Since you don't own the car and it's hard to know how modifications will affect the car's depreciation, you can't customise the car. You can put a private plate on a financed car, but that's as much as you can do. If you don't opt for an "In Stock" car, you can choose the specifics of the trim but once you're waiting for the new car to be delivered, you can't make any adjustments!
Let’s talk money.
Okay great - but is leasing actually any cheaper? Show me the figures!
Let’s imagine you want a car for 3 years. Because you’re smart, you decide to check out LeaseFetcher for the best deal. You find a great spec, brand new BMW 3 Series Saloon for a cool £293.41 a month (plus an upfront cost of £2640.71, assuming you don't opt for a no deposit car lease deal) for 3 years on a 30,000 mile lease. Total cost of the car at the end of the contract? £13,203.47.
Now, if you were to buy outright, you’ll probably have to take out a personal loan, assuming you don’t have £34,000 lying around. Remember, you’re also going to need to add interest on top of that loan - so even with an excellent interest rate of 3% over 3 years, this will cost you a whopping £988.15 a month, bringing you to a total cost of £35,573.57.
I know what you’re thinking: “But I own that car! I can sell it on!”
True. But you’re going to have to swallow the bitter pill that is outrageous depreciation. For a BMW 3 Series Saloon, you’re looking at 40% depreciation in value over 3 years. So, you paid £34,000 not even one World Cup ago and now it is worth a pitiful £20,400. Ouch.
By leasing, you avoid taking this depreciation hit. You’re paying to rent the car essentially and you don’t have to deal with selling it on. Less stress, more driving in your fancy BMW.
If we put these numbers side by side, we find that you’re paying out:
- £13,203.47 for the lease.
- £15,173.57 after buying then selling.
You’re saving almost £2,000 by leasing here. Plus, you’ve not had the financial strain of forking out almost a grand every month on the car. Or the strain of selling it on. Win, win, win.
Even if you just bought the car outright, you’d still be paying £400 more than you would by leasing.
How quickly does the car you want depreciate?
It's finally time - you've had your eyes on the Maserati Quattroporte for a while. You're going for it.
But there’s a little voice in your head that just won’t go away. “Think of the depreciation!” it cries out. You try to shake it off. It can’t be that bad, can it?
Actually, yes it can. It can be that bad. This sleek Masarati loses a staggering £50,000 of its value after just 3 short years… maybe go for a nice Skoda Fabia instead then?
If the car you have your heart set on depreciates considerably, it is well worth leasing instead. You don’t need to worry about taking the depreciation hit, but you still get to drive the car of your dreams around for a very reasonable monthly price.
How long do you want the car for?
Cars can become a part of our everyday lives, a part of our routine. Perhaps you easily get emotionally attached to your trusty car and its beautiful McDonald’s ketchup-stained seats.
If you anticipate keeping your car for an extended period of time, say a decade, it’s likely a more financially-savvy move to buy the car outright. You’ll have it a lot longer than the longest lease you’ll see advertised, which is typically around 5 years. You don’t need to chop and change every 3 years and have to work all the kinks out of another new model.
However, maybe you like a bit of luxury in your life - a brand new, mechanically sound and most importantly, stain-free car every couple of years or so. Leasing gives you that option at a monthly price that is more affordable than a bank loan.
Are you a careful driver?
“I swear I did not see that wall. That wasn’t there last week.”
If this is something you often catch yourself saying, then maybe don’t take out a lease. You’re liable for all damage not covered by the “fair wear and tear” policy.
If your lease car is write off, you have to pay up all your remaining payments to the leasing provider unless you have lease GAP insurance. We discuss more about whether gap insurance is worth it if you're interested.
If you own the car, you might not care about the odd dent or scratch, but your lease provider definitely will.
How's your credit score?
Whether you’re taking out a loan or applying for a lease, the companies want to know they can trust you, and no, you can’t ask your best mate to assure them you always pay back the money you borrow for chips at the end of a night out.
When it comes to negotiating car loans, there is some serious hard cash involved, so the finance companies are not going to take the evaluation process lightly. If you’ve got a strong credit score, then you’ll have a lot of bargaining power to secure low interest rates.
If you have a weak credit score… well, good luck paying off that extortionate loan.
Leasing does require a hard car lease credit check. If you know you've got a less-than-satisfactory credit score, and you're wondering "do you need good credit to lease a car?", you should know there are options specifically designed for those with poor credit scores. Plus you can often take out a guarantor car lease. They do have limited ranges of cars and you can expect to pay a higher monthly premium, but it’s likely to be more cost-effective than many loans.
It's worth double-checking you have a decent credit score before applying - ClearScore is a great way to quickly check this.
How many miles do you expect to do?
When you own your own car, you can do as many miles as you’re able to afford fuel for, and the only negative impact of it is its potential fall in resale value.
With a lease, you have a set amount of miles you're allowed to do, or else you are charged per extra mile for excess mileage. This can rack up a fair bit.
If you just use your car for the commute and popping out to the supermarket, you can take a low-mileage lease out at a great price.
However, if you regularly clock in thousands of miles a month, you want to take out the highest mileage you can. Unfortunately, this will increase the price of your lease by quite a bit.
Who should lease?
Hopefully by now the message is clear - a lease car is a great option for some, but not for everyone.
Let's return to Barry and Lorraine to see if they’ve made up their minds.
Lorraine wanted to make sure she had an updated and flash new car to fit her professional aesthetic. She doesn’t want to worry about long-term car maintenance and she doesn’t have the budget for a brand new car, only to sell it on in a few years. Leasing is perfect for Lorraine: no MOTs, low likelihood of repairs, and she can update her wheels frequently.
For Barry, leasing could benefit him, but he really isn’t keen on trading in his car so often. He racks up a lot of miles in a year, so this isn’t really suited to leasing either. His monthly costs would be driven up considerably, so he might as well buy outright since he’ll have it for so long.
Are you a Lorraine or a Barry?
Lorraine and Barry have different needs and wants when it comes to cars.
Leasing is a great option if you’re someone who likes having a new car often, who doesn’t want to deal with extensive lease car maintenance and repairs, and if you want a car that would be beyond your budget.
Leasing is not so great if you prefer to keep your car for years, if you rack up a lot of miles, and if you worry you’ll end a lease with a fair few scratches and dents in the bodywork.
Weighing up these pros and cons will help you decide if buying or leasing a car is best for you! If you decide that leasing is the right option for you, make sure you check out Lease Fetcher to make sure you get the best possible business car leasing or personal car leasing deals.