Everything you need to know about car leasing

Leasing, or personal contract hire (PCH), has long been a tempting route to getting behind the wheel of a new car, often costing less overall than personal contract purchase (PCP) or hire purchase (HP) – as long as you’re happy to never own the vehicle. 

After putting down a small initial payment, you could often run a car with lower monthly payments than you’d face with a PCP or HP deal.

However, it’s been a turbulent couple of years for leasing companies, and a combination of factors made personal contract hire (PCH) deals pricier per month than a PCP. According to the latest quarterly report by the British Vehicle Rental and Leasing Association (BVRLA), there was a 7.1% fall in personal car leasing in 2023 fuelled by an “unholy trinity” of car price inflation, rising interest rates and the increased cost of living.

As a direct result, private motorists began “shying away from like-for-like replacement vehicles when monthly rentals soared by well over 30%, and frequently higher”.

The situation is starting to switch back, though, and optimism is reappearing in the private leasing sector, with an upturn in car sales and far more generous discounting by franchised dealers helping to make leasing costs more appealing. Most of the upturn in personal lease agreements is predicted to be for petrol vehicles; 66% of new PCH contracts in the last quarter of 2023 were for petrol cars, and only 16% were for electric vehicles (EVs).

However, there is optimism that more affordable lease deals will soon be found on EVs, too. This is being aided by increased discounts as car makers rush to meet zero-emission vehicle mandate thresholds that require them to sell an increasing number of EVs each year.

All this is good news for consumers, because there are plenty of instances where you can save money by leasing via PCH, rather than taking out a PCP or HP deal.

Leasing vs PCP: how the costs compare

Table 1: PCP costs

Table 2: Leasing costs and savings

How electric models compare

Table 1 PCP costs

Table 2 leasing costs and savings

Table notes: 

Terms: PCP Deals are all 36 months, 10,000 miles per year and 15% deposit unless stated otherwise. Lease deals are all 3 months initial payment and 35 payments after that, 10,000-mile limit per year unless stated otherwise *14.8% deposit; **19.5% deposit; ***35 payments; ^ 9000 miles per year; ^^first payment £336

The benefits of leasing 

One big advantage of leasing is that the initial deposit is usually much smaller than with a PCP deal, potentially making buying a new car more accessible. An average new car PCP deposit is around 10-15% – circa £4500 on a £30,000 car, and if you have to borrow that money, you’re likely to end up paying interest.

With a leasing deal, you can pay as little as one monthly payment up front – around £300 for a car with the same £30,000 list price. However, putting down a bigger deposit will handily reduce your monthly payments; three instalments up front is common practice.

In many cases, the monthly payments will be lower than with a comparable PCP deal, and some things you’d usually pay for separately, such as road tax (VED) and breakdown cover, are also generally included in a lease deal.

Another advantage is that you can simply hand the car back when the deal ends and then lease another one. There’s none of the hassle of trading the car in or selling it privately.

It's also a great choice for businesses. Business contract hire allows a company to keep its fleet up to date, use cars with all the latest efficiency technology and claim back at least some of the VAT on the rental.

How is a leasing deal structured?

The typical contract hire deal is advertised as, for example, '3 + 35'. What this means is that at the start of the lease you’ll pay an initial payment that's three times the amount of the normal monthly payment. The second figure refers to the length of the contract in months after the initial payment.

There are numerous contracts available to suit every budget, and '3+48' and '6+24' are also common contract terms.

The downsides of leasing

One notable difference between a PCH and a PCP deal is that the former doesn’t give you the option to own the car outright. However, when you consider that 80% of people who take out a PCP deal will return their car and sign up for a new deal at the end of the contract, few will find this to be a major concern.

Similarly, unlike PCP, a PCH deal doesn’t give you the flexibility to settle the finance early and switch to another car if you fancy a change.

The most important thing to consider is what happens if your circumstances change and you need to end your contract early. With a PCP or HP deal, you can do so and not incur any penalties if you’ve already made half of the payments due. With PCH, though, you’re likely to face a hefty early termination fee that could amount to thousands. Many lease deals stipulate that you have to pay at least half of the remaining monthly payments if you want to end the lease early, and some companies will want all the outstanding payments. This means it’s vital that you carefully consider how long you want the lease to last and ensure that you’ll be able to meet all the payments.

What is wear and tear?

Another thing to be aware of is vehicle condition. It’s obviously wise to look after your car well, but, if it’s on a PCP deal, you won’t be charged a fee if it picks up a few marks; you’ll just risk getting a lower price for it from the dealer. With a lease deal, the process is more formal. If the car shows more than what the finance company deems fair wear and tear, you’ll be expected to cover the cost of repairs.

Most companies have a fair wear and tear guide, either on their website or included with the contract. It's a good idea to look at your car a good three months before the contract is due to end and have repairs carried out on any dents or scratches on the bodywork, nicks or tears in the upholstery, and scratches on the wheels.

Obviously, the best way to avoid having to carry out these repairs is to look after the car fastidiously in the first place, but sometimes things happen. The important thing is to stay in touch with the finance company and make sure you know exactly what you're liable for.

There have been reports of leasing companies presenting customers with unexpected and excessive repair bills when cars are returned. To minimise the chance of this happening, a couple of months before the contract is due to end, check your lease company’s definition of fair wear and tear. 

Issues that are likely to result in fees include dents and scratches on the bodywork, nicks or tears in the upholstery, and scratches on the wheels. If your car has any of these, it’s advisable to get them fixed before the lease ends so you don’t have to pay penalties imposed by the leasing company when you hand the car back. 

It’s also advisable to check the car over carefully and take photographs of it from every angle when you take delivery and when you hand it back, so you can use these to show the condition of the car if there is any dispute.

What is a mileage limit?

All leasing contracts are based on a fixed mileage, and if you exceed the agreed figure, you will face an extra charge for every extra mile travelled. This can be quite costly, so it's a good idea to calculate as accurately as possible the mileage you will drive, and ask for a quote based on this.

Mileage on a leasing contract is usually advertised as ‘per year’. For example, 8000 miles or 8k per annum, which adds up to a total contract mileage of 24,000 or 24k over a three-year lease. That means if you do fewer miles in one year, you’ll be able to carry any unused miles over to the following year.

The company you lease the vehicle from should always advise you of the excess-mileage charge up front and it should also be shown on your contract. The excess-mileage charge varies depending on the vehicle, so make sure you know what it is. If you think you’re likely to exceed the overall limit, you should talk to the leasing company immediately, because it might be possible – and cheaper – to increase the monthly payments rather than pay the excess fee at the end of the deal.

Do I have to worry about maintenance?

The vehicle remains the property of the leasing company throughout the length of the lease term because you are, in effect, merely hiring it. But you’re responsible for covering any maintenance costs, such as servicing, which come up during the course of your contract, as well as any repair costs.

Most car leasing agreements do not include maintenance as standard. However, many companies offer an optional maintenance package that will include it for an extra monthly fee. These can offer peace of mind and make budgeting easier.

Maintenance packages can sometimes be tailored to what you need, so can include servicing, repairs, new tyres and batteries, exhausts, breakdown recovery and MoT testing. However, it pays to work out what you think you’re likely to need.

Bear in mind that all new cars are covered by a manufacturer's warranty for the first three years do not need an MoT test until they are three years old. Keep in mind, too, that servicing costs and wear and tear items, such as tyres, are not covered by the car’s warranty.

Does a leasing contract include car insurance?

No. Car insurance is not included in a leasing contract, so it’s up to you to arrange appropriate cover. Leasing companies demand that the car is insured under a fully comprehensive policy.

Comprehensive insurance is the most complete, all-encompassing cover for you and your vehicle, because your car will be repaired even if any accident is your fault. Third-party insurance only pays for the repair of the other party’s vehicle, not your own.

What happens if I miss a car leasing payment?

Late payments with any form of finance can affect your credit score and make it harder to arrange finance in future, or more expensive, because you won’t get the best rates. The best thing to do if you have missed a single payment is to contact the finance company as soon as possible. If you can pay it soon after the due date, you’re likely to incur a late payment fee and that should be the end of the matter.

If you’re struggling to afford your monthly payments on an ongoing basis, it’s much better to talk to the finance company than to fall behind. The company might be able to extend the contract to reduce each payment, or perhaps find another solution. Some lenders will be more flexible than others, but the finance company has the right to repossess the car if you keep missing payments.

What Car? says…

Leasing via PCH often works out cheaper overall than running a car on a PCP contract, plus its hassle-free nature can make life easy. It isn’t for everyone, though.

Before entering into a contract, you’ll need to be confident that your income will be steady enough that you’ll be able to keep making the payments for the duration of the agreement, and that you’ll be able to stick within the mileage limit.

You have more flexibility with a PCP deal, too, such as being able to end your contract early if you want to change to a different car earlier than you expected.

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