Personal Leasing: Everything You Need To Know

According to the British Vehicle Rental and Leasing Association (BVRLA), personal leasing is growing by 8% each year in the UK, making it one of the fastest growing forms of car finance in the country.

And, to be honest, it’s not exactly hard to work out why. Personal leasing really simplifies the process of getting access to a car, which can be a bit of a hassle if you don’t have the exact money upfront.

Chapter 1

Types of personal leasing

There are basically two different types of personal leasing to choose from.

The main types are:

Personal Contract Hire

I guarantee this will probably be the type of finance arrangement you think of when you hear the words, personal leasing. Personal contract hire is relatively simple to get your head around – you effectively rent a car from a broker for a given period of time, paying monthly repayments and interest. When you come to the end of the amount of time that you were leasing the car for (usually three to five years), you’ll just give the car back to the company that you leased it from at the start.

Personal Contract Purchase

On the surface, Personal Contract Purchase looks like much the same thing as Personal Contract Hire and any other form of personal leasing. There is a key difference however– with PCP you get the option of buying the car at the end of the lease term.

The set-up process and general way that the finance works in pretty much the same way as other types of personal leasing, except that at the start of the lease, a figure called the ‘Balloon Payment’ will be calculated. It’s worked out by crunching the numbers of one of two figures: the residual value or the guaranteed future value of the car.

When you pay that final monthly payment, you’ll be presented with three possible options:

  1. Return the car to the leasing company and walk away into the sunset, never to return
  2. Pay the balloon payment and become the full owner of the car
  3. Part exchange the car for another from the same company, using the remaining equity to get a discount.

As you can pretty much gather, PCP is a lot more complicated than Personal Contract Hire, hence why PCH is steadily improving in popularity as a form of personal leasing in the UK.

Chapter 2

How does the leasing process work?

So, now you know what personal leasing is, and the forms it can take, you probably want to know how the leasing process goes.

The exact details of what happens during this will obviously be dependent on a few things, namely what type of personal lease you’ve decided to go for.

That said, the process of actually getting a car lease is pretty similar across different types of finance– if you’re curious, I explore this in more detail in my blog about the leasing process which you can read at the end of this section.

Basically though, you can split the process into three parts:

#1 The set up

This is when all the intricate details of the lease are worked out and set up. You’ll pick your car and you’ll undergo a credit check. If you’re approved, you’ll then work out your initial payment. This is a payment that essentially acts as an unofficial deposit and it has a direct effect on how much money you’ll pay each month for your car.

The initial payment can be anything from one to twelve months’ worth of monthly payments. You’ll find that the larger the initial payment you offer, the cheaper your overall monthly repayments will be in the long term.

#2 The lease itself

During the lease, you’ll have to make sure that you pay your monthly payments on time, otherwise you’ll run the risk of getting the car repossessed. You’ll also need to make sure that you get the car regularly serviced at particular intervals – most contracts usually require this. If you don’t you’ll be breaking the terms you legally agreed to.

Also bear in mind that if you don’t keep up to date on the repayments, you risk getting the car repossessed– fail to pay three repayments and this could happen.

#3 The end of the lease

At the end of the lease you’ll need to make sure that the car is returned in a good condition that’s in line with requirements of the Fair Wear and Tear policy of your dealer. Most dealers follow the BVLRA Fair Wear and Tear guide.

If your car isn’t in the right condition when you return it, you open yourself up to having to pay a penalty. And be warned – they’re usually pretty hefty. You’ll also have to make sure that the mileage of your car is within the amount agreed to at the start of the contract otherwise you risk being charged for every mile you exceed.

When you come to the end of the period that you are leasing the car for, you’ll have to arrange to give it back to the dealer that you first leased it from. You’re then free to walk away or to get another lease out on a car.

Chapter 3

Personal leasing and deposits

With a personal lease, you don’t actually pay a deposit. Instead, you pay a thing called the initial payment. This is essentially three upfront monthly payments.

It doesn’t necessarily have to be just three month’s worth of payment though. You’ve also got the option of putting down six, nine and twelve month’s worth of payments. Why would you do that, you ask?

Well, as with most forms of finance, the higher a deposit you put down, the cheaper your overall monthly payments are likely to be.

Whatever you do, though, don’t call it a deposit. Finance companies tend to get quite annoyed because technically the two are different (although, to be honest, there isn’t much that separates them in practice).

Chapter 4

Repayments and personal leasing

Repayments for a personal lease aren’t worked out in the same way as repayments for a car that you’re buying outright. They’re normally worked out according to how much value that the car loses over the course of the lease.

Repayments for a personal lease can actually work out cheaper than repayments for hire purchase or for a car loan. This is because with a lease the figure you pay each month in the form of a monthly repayment is actually the value that the car is expected to lose whilst you’re using it – not the complete value.

If you want to get technical, the exact figure that’s used is called the residual value.

If you can’t repay your personal car lease, you’re going to face having the car repossessed – like you would with the failure to pay for any other item you’ve received through credit or finance. And that could have serious effects on your credit rating too if you’re not careful.

There are usually two types of repossession when it comes to leasing:

  1. Voluntary repossession
  2. Involuntary repossession

Voluntary repossession is when you can’t afford to pay for the lease on the car and decide to return it, by your own initiative, to the leaser. Most contracts will have some way of letting you voluntarily repossess a car if you need to.

Of course, it isn’t just a case of returning it scott free though – you’ll probably have to pay any remaining lease payments – but it’s a good way to cut your losses and not suffer too many repercussions.

The other type is Involuntary repossession. This is a big one and one that can end up with you being hauled to court. If you miss three monthly payments on your lease car, expect to have involuntary repossession proceedings started against you.

Chapter 5

Benefits of personal leasing

1. You escape the curse of depreciation

New cars have the stupid habit of losing value really quickly. And we’re talking, losing 10% of their value when you first drive it-kind of quickly.

Cars are seen as an asset that’s going to steadily wear out over time. And in the early 21st century, when things seem like they’re made to be broken, it’s hard not to see the truth in that statement.

The AA (who are generally pretty trustworthy) estimate that new cars lose about 40% of their value in their first year of being used. And it doesn’t stop there – by the end of the third year of ownership, your car is likely to have lost 60% of its initial value.

That’s one hell of a spicy figure if you’re worried about recouping money when you sell a car. It means that in the majority of situations, you’ll end up losing money, rather than gaining it.

How quickly your car depreciates in value will depend on how many miles you do in it and what type of car it is.

The good news is that with personal leasing you’ll not have to worry about depreciation– you don’t own the car, and you never will! Therefore, you’ll never run the risk of losing money through selling. Problem solved.

2. It can be a lot cheaper than buying

As I’ve alluded to further on up the page, one of the most attractive things about a lease is the fact the monthly payments are worked out according to how much value the car will lose a month, rather than the car’s total value (ie. what it’s worth on the market). This means that leasing monthly payments can work out a damn sight cheaper than repayments for car loans or other types of car finance.

Obviously, some types of car lease will be cheaper than others. Personal Contract Hire, for instance, usually works out a bit cheaper than Personal Contract Purchase in terms of the monthly payments. If you want to make sure you’re not paying too much, your best bet is to do some thorough research before you get tied into anything.  

3. It’s good if you want a high-spec, new car, regularly

Another great benefit of personal leasing is that you’ll be able to get access to the latest cars – ones that are top of the range and feature the latest technology.  

New cars are expensive. You can expect to pay anywhere from £20K upwards for a decent car and this isn’t exactly small change that you can find down the back of your sofa. As a result, you’re likely to not be able to buy a brand new car every five minutes – let alone a car that’s at the top of its range and features the latest technology.

A personal car lease only runs for around three to five years. At the end of the contract term, you’ll give the car back to the company and – probably – take out a new lease. Because you don’t need to pay much upfront, you’ll usually be able to afford a high-spec car for a relatively small monthly payment.

Chapter 6

Negatives of personal leasing

1. You’ll never own the car

Personal leasing isn’t right for everyone. Some people don’t like personal leasing because of the fact that you’ll never be the actual owner of the car. For some folks, being the owner of the car is a big deal-breaker. Paying for a car outright can give you a sense of security– useful if you aren’t comfortable with getting yourself tied into a financial contract that can run for years.

There are all sorts of reasons that folks might prefer to own a car. Some people want to try and make a profit when they sell it (although, that’s a pretty optimistic objective though, especially when you consider the fact that cars lose value so fast, making them a hard item to make money from.)

2. You’ll have to make sure you return the car in a good condition

All cars are going to suffer some type of damage – whether through your own fault or by something that you can’t control.

If you don’t want to pay a hefty charge at the end of the leasing process though, you’ll need to keep the car in a decent condition. That’s because most car leasing contracts have a clause that will mean you’ll have to keep, and return, the car in a good condition.

You’ll be covered for ‘fair wear and tear’ but this is often quite strict when it comes to leasing a car. For instance, there are very specific measurements that are allowed for scratches and very clearly defined types of acceptable repairs. Some folks can feel that the condition requirements laid down by leasing companies can be pretty draconian and just an attempt at gouging more money from you. I’m going to be diplomatic and reserve judgement on the issue, but it’s a valid thought and definitely one worth bearing in mind.

3. ...and that you stay within your monthly or yearly mileage allowance

Leasing companies put mileage limits on each of the cars that they offer to drivers. These limits are designed to protect the value of the car. The logic from the leasing companies is that the less miles a car does, the lower the loss in value – hence why they don’t want you racking up tens of thousands of miles in a year.

For some drivers, particularly those who commute long distances, or have close family members in far-flung parts of the country, being restricted to a particular amount of miles can be really frustrating and limit how much you use your car.