So you’re thinking of trying out car finance for your next car.
But are you jumping the gun by signing up for a brand new car on a 3 year personal lease?
We’ll look at exactly how car leasing works when it comes to costs, the things you’ll still have to pay for, and whether lease deals are everything that they’re cracked up to be (disclaimer, we think they are).
What determines the cost of a lease car?
First of all, it’s worth pointing out that leasing, or contract hire, is just one of many different car finance options, including Car Hire Purchase (HP), Personal Contract Purchase (PCP) and taking out a personal car loan.
The main thing that sets contract hire apart from the other options is that at the end of the contract you simply hand the car back. No need to worry about negative equity, trying to trade in the car, or scraping together a big balloon payment to buy the car.
When you sign up for a business or personal contract hire deal, you do so without any intention of gaining an asset at the end of the agreement.
So what are you paying for?
Simple. You pay the amount that the car is expected to depreciate over your contract term. This is estimated from the duration of your leasing contract and the number of miles you intend to drive in that period, referred to as annual mileage. There is also an interest rate on a car lease.
You can check out our car leasing tips to push down the cost. By waiting til the best time of year to lease a car or adjusting your car lease contract length, you can shave off hundreds. You can also try out some car lease negotiation techniques or inquire about a car lease part exchange to make up some of the cost with your existing car.
Cost of Leasing vs Buying
There are other finance options you can explore in the realm of leasing, like lease purchase, but here we will focus purely on regular contract hire.
Say you wanted to purchase a Nissan Qashqai 1.5 dCi Visia 5dr outright, it would set you back £21,595.
If you decided to get that on a lease, say for 3 years with 8,000 miles, the cheapest deal on Lease Fetcher at the time of writing would total £9,071.16 inclusive of road tax, initial & total monthly rental.
A handy depreciation calculator tells us with 94% confidence that the average rate of depreciation for a Nissan Qashqai over 3 years is 46%.
By the end of that contract, the vehicle will have an estimated resale value of £11,661.30. In other words, within 3 years, the vehicle has depreciated by a mind-blowing £9,933.70.
So which is cheaper - should you lease or buy a car?
Lease for 3 years with 8,000 miles = £9,071.16
Buy, drive 8,000 miles per year for 3 years (+road tax) = £10,308.70
Now, the example above assumes that you're wanting to sell your car after three years. If you're wanting to keep the Qashqai for a longer period of time this would be a slightly different calculation.
If, however, you're a petrol head or just like the smell of a new car, then leasing can be a really financially sound decision - depending on your annual mileage and a few other factors that we'll get back to later in this article.
Another thing to take note of is that things rarely work out in real life the way they do on paper.
The resale price offered above (£11,661.30) assumes perfect conditions for resale which is rarely the case. It assumes that you can actually get someone to purchase the vehicle for that price. But that’s a big chunk of cash for someone to give to a private seller that can’t offer them a warranty.
So, perhaps you decide to sell after 3 years and there’s no interest. Do you leave it idle by the roadside for weeks on end, splashing on Autotrader ads and road tax until it does eventually sell? Or would you trade it in? It might seem the easiest option, but bear in mind that car dealers need to make a living too and that they won't be forking out the full £11.6K for it. With leasing, you don’t have to worry about any of that. You can just give the car back and get a new one.
There’s also the chance that the model you choose will be devalued by factors out of your control. This could be new emissions regulations which make your car less desirable or even a fault in your particular model. Electric vehicles such as the Nissan Leaf, Kia Soul Hatchback or Tesla Model 3 are all becoming more popular, but depreciation is particularly hard to predict because improved battery technologies and charging points are being released each year. Whatever happens, with a lease, any unpredictable losses get absorbed by the leasing company.
Leasing companies, as credit brokers, are bound by the Financial Conduct Authority (FCA). This means that they have to carry out a car lease credit check to make sure you are a reliable debtor and that you can afford the finance option on your new vehicle.
You generally do need good credit to lease a car, so if you have a poor credit score and pose a greater risk to the broker and you may not be accepted for the cheapest car leasing deals. There are ways around it, like if you ask someone to act as your car lease guarantor.
If you have a poorer credit score, the cost to lease a car will be greater than if you had a good or excellent one.
Even if your credit score was good to begin with, if you miss payments, you'll damage your credit score. If you become overwhelmed by the payments for any reason, you can ask the leasing company about setting up a car lease transfer to pass the contract to a new lessee so you can keep your credit score in a good state.
Initial Rentals and Monthly Payments
When you lease a car, you’ll have to put down an initial payment, known as a deposit or 'initial rental'. This deposit is not refunded and is essentially your first month’s payment.
However, there is a lot of flexibility when it comes to how much you want to pay in your first month. Brokers will advertise lease deals with anything ranging from ‘no deposit leasing’ (equivalent to 1 month’s initial rental) to 12 month’s initial rental (an upfront payment equivalent in size to 12 of the monthly payments).
You can opt for the larger payment to reduce your monthly payments further down the line. This is great if you know that you’ve got cash sitting and you’re likely to spend it!
Alternatively, a no deposit lease means that you will pay equal amounts for each month of your contract. This results in a larger monthly cost, but can be a great option if you’re strapped for cash in the short term and badly in need of a new car.
Generally, the total cost that you pay over the course of your lease term will be the same, though occasionally car leasing brokers will incentivise a larger downpayment.
What is included in my monthly payments?
We already mentioned that you're paying the cost of depreciation of the car, but there are other things that come into this. This includes things that affect the rate of depreciation, plus some other admin fees.
As we’ve mentioned, the monthly payments take into account the number of miles that you expect to drive over the term of your contract. Mileage is one of the biggest factors influencing the rate of depreciation of a car, so you’ll notice the price begin to jump as you increase your predicted annual mileage. It may feel like a harsh penalty, especially if you’re a careful driver, but don’t forget - you don’t actually own the car. The finance provider will have to sell the car at the end of your contract. The higher mileage lease deal they offer you, the less money they will make from the sale.
Road tax is included when you lease a car! This will last for the duration of your lease so you shouldn’t have to worry about renewing.
As you’ll notice, we work with brokers from right across the UK. But you needn’t worry if you spot a deal on Lease Fetcher from a dealership on the other side of the country. All cars on Lease Fetcher come with free UK mainland delivery.
It’s late at night. It’s one of the coldest winters on record and the heavens have finally opened. Your car has come to a standstill at the side of the road. You’re still waiting on the 24-hour emergency call-out team to come and collect you.
Thankfully, breakdown cover is included with most lease deals. If it's not included, you can often get this at a super competitive price if you arrange this with your leasing broker.
The main difference between personal and business car leasing is that you pay VAT on your personal car lease. If you're a business, you can reclaim 100% of the VAT. The VAT is bundled into your monthly payments. You can read about how business car leasing works in more detail if this is relevant to you.
What’s not included in my lease payments?
There are a few things that are added on top of your initial/monthly lease payments, usually on a one-off basis. Not all are essential!
When you sign up for a lease there will usually be an additional fee, usually between £150-£200. This is sometimes called a bank fee or an administrative fee, and covers the cost incurred by the company leasing company for processing the leasing agreement.
You may wonder, "do lease cars include insurance in the price?", but in short, the answer is no. It’s important to remember that you will still need to purchase an insurance policy after you’ve signed the lease agreement.
The legal requirement in the UK is for 3rd party insurance, that is, insurance which covers any injury or damage to the other person and their car. However, the leasing company is the registered keeper of the lease car, so they want to make sure you've got as much coverage as possible - they will usually require that you take out a fully comprehensive insurance policy which covers any damage to the leased car as well.
This is only fair really - the car still belongs to the finance company!
If your lease car gets written off or your lease car is stolen Even with a fully comprehensive insurance policy, the insurer will only pay out what they believe the car is worth at that moment in time. Of course, the agreement was that you paid the amount that the car depreciated and hand back a fully functioning car ready for resale at the end of the lease. So who makes up the extra money?
Well… you do.
Unless you purchase GAP insurance, which will cover the difference between the vehicle's residual value at the end of the contract term and the remaining finance payments. Check out our article on whether GAP insurance is worth it.
Excess Mileage Charges
See that annual mileage limit that you have to decide upon at the start of your contract? That’s in place so that the finance provider is able to make a more accurate guess at how much your vehicle will depreciate over the length of your contract. This ensures that they are charging you the right amount each month. Go over that amount, and you’ll have to pay an excess mileage charge.
The excess mileage charge is calculated on a pence per mile basis. The cost per mile differs depending on the broker and the model that you choose, so it is worth researching before you sign up.
Extended Manufacturer’s warranty
If you’re going to be taking out a lease for longer than the standard manufacturer’s warranty, or you intend to drive more miles during your contract than the warranty covers, the we strongly recommend that you take out an extended manufacturer's warranty!
Damage to the vehicle
One of the conditions of the leasing agreement is that you hand the car back in a respectable condition. That’s not to say that it has to be like new - some wear and tear is to be expected, especially if you’ve driven the car 30,000 miles per year for 4 years.
The leasing company will give you a copy of the BVRLA fair wear and tear guide (British Vehicle Rental and Leasing Association). This should give you a pretty good idea of what is deemed an acceptable condition for the car to be returned in. What happens at the end of the lease is that an inspector will look over the car and note down issues that you'll need to pay for.
You will be expected to repair more significant damage before you return the vehicle. If you fail to do so, you will be handed a bill of hefty lease car return charges by the broker for any lease car repairs that need to be carried out.
Lease car maintenance is surplus to your manufacturer's warranty and usually covers additional costs of perishable items such as bulbs, batteries, puncture repairs, exhausts, belts, alternators, starter motors and wiper blades. It will also cover any labour costs. While by no means necessary, it means you can be sure that you won’t have any unexpected bills for things that need to be replaced before you return your car. We discuss whether paying extra for car lease maintenance is worth it.
Company Car Tax
If you're a business, you'll have to pay company car tax called "benefit in kind" tax on all company cars. The BIK rates are set no matter whether you buy or lease and should be arranged separately from your lease deal. Company car tax on electric cars is very low, thankfully!
Fuel is not included in your monthly fee, so if you’re cost-conscious you should probably still be on the lookout for a car which is highly economical.
Are there any other benefits to leasing a new car?
Technically, you can lease a used car, but there are a load of extra benefits to leasing a brand new car.
Provided you’re leasing for no longer than 3 years, you won’t ever have to worry about putting your car in for an MOT. What a relief! Making sure a car passes its MOT can be a costly affair, but with a brand new car, an MOT won’t be required.
Another benefit of driving a new car is that you’ll get the full standard lease car warranty. Depending on what length contract you are on and how many miles you intend to drive, this should be sufficient for repairing any defects for the duration of your lease. However, it is worth bearing in mind that there are usually some limitations to this plus, the warranty only applies to defaults - not any damage caused by you.
For example, the Audi standard manufacturer’s warranty covers you for a minimum of 2 years unlimited mileage, with a 3rd year included up to 60,000 miles. If you intend to rack up more miles than this in a 3 year period, or you have a 4-year lease contract, then this will leave you without cover for the last part of your term. It might be worth looking into an extended warranty in this case.
You might be required to use Audi Centres for any servicing so that you don’t void the warranty but this will often depend on the manufacturer.
Provided that’s all ok, it should provide some extra peace of mind!
How does the cost compare with other finance options?
If you're not 100% stuck on leasing just yet, we've explained how other finance options work too. You can see which suits your budget best.
Any additional costs?
- Built in Lavazza 500 Espresso Machine anyone?
- How about Vauxhall’s “starlight headliner” which uses LEDs to recreate the twinkling night sky above your head?
- Oh and you absolutely MUST have Mercedes’ heated armrests
Maybe it's an extra £1,034 over the course of your lease term, or £43 extra per month on a 2 year contract. Yes, you want to impress people with your new car, but you probably don’t need all that, do you?
Optional extras can quickly add up, so make sure that you’re absolutely certain that you will be able to afford your new vehicle before you sign up to a lease deal!
You can also put a private plate on a financed car, but you'll have to pay admin fees for addition and removal, as well as registration, which are not included in the lease price.