We explain what car leasing is and how it works in detail...
What is car leasing?
Also known as personal contract hire, leasing is one of the most affordable and hassle-free ways to access a new car. You have to pay a deposit, followed by regular monthly payments for a set period of time – often two or three years – but these are generally lower than with other forms of car finance.
The big difference between leasing and other types of finance is that you are effectively renting the car and you do not own it after you’ve finished making the payments.
How does car leasing work?
The terms and conditions of any car finance should be made very clear before you sign the contract, and leasing is no different.
There is usually a pre-annual agreed mileage limit, for example, 10,000 miles. If you exceed that then you’ll have to pay extra money at the end of the contract.
The majority of lease contracts do not include maintenance, though there may be an option to add it to the monthly payments. Unless you specify it, you will be responsible for servicing the car, but it may also be possible to buy a manufacturer’s service pack that does the same job.
You’ll also need to make sure the car is in good condition before you hand it back at the end of the contract. If it’s damaged, then the finance company will expect you to cover the cost of repairs.
How does car leasing differ from PCP?
On the face of it, leasing and personal contract purchase (PCP) – another popular form of car finance – are similar. Both involve a deposit and making regular monthly payments.
However, the clue is in the name – personal contract ‘purchase’ – because you pay off the cost of the car during the course of the contract, and you have the option to make a larger final payment and become the owner at the end of it. It’s not unlike a mortgage, where you make regular payments and eventually own the property.
Buying a car with a PCP is usually more expensive than leasing an equivalent one, because you’re paying off the value of the car and paying a fee to the finance company.
At the end of a PCP contract, you have three options: hand the car back to the finance company, trade it in for a replacement on a new PCP deal or keep it. If you pick the final one, you normally have to make a ‘balloon payment’ to cover the car’s guaranteed future value (GVF), which is set at the start of the contract and is the amount the finance company thinks the car will be worth at that time.
When you’re leasing a car, you simply hand it back at the end of the contract or arrange another lease. It may also be possible to extend the contract and hang onto the existing car for longer, but you’ll have to arrange that with the finance company.
Advantages of leasing
- One of the most affordable ways to get long-term access to a car
- Deposits are normally cheap
- You can have a better car for a lower equivalent cost
- It’s low hassle
Disadvantages of leasing
- You don’t own the car; you’re just renting it
- Contracts don’t normally include maintenance
- You have to pay if you exceed your mileage limit
- End-of-contract damage charges
How can I get the best deal?
The best way to get a great deal when leasing a car is to check out What Car?’s personal lease special offers. We keep track of the top personal contract hire offers from franchised dealerships around the UK to bring you the most competitive deals in the market.
You can search by business or personal lease contracts, annual mileage, payments and length of contracts or by the specific type of car you want.
How are the payments structured?
Leasing contracts are usually arranged over two or three years and involve an up-front deposit, which is often the same amount as three or six months’ payments.
They are frequently advertised as 3+23 or 3+35, which means a deposit of three months, followed by either 23 or 35 monthly payments of a specified amount.
Maintenance is not normally included in standard leasing contracts but you can usually pay extra to add it to the total monthly fee. Insurance is not included either, so you will have to arrange and pay for this yourself.
What happens if I miss a payment?
It’s never a good idea to miss monthly payments if you can avoid it. Late payments with any form of finance can affect your credit score and make it harder to arrange finance in future.
If you have missed a payment – either by accident or because you can’t afford it – then the finance company may charge you an additional fee; the exact penalties for late payments should be outlined in your contract. Some lenders will be more flexible than others, but if you keep missing your payments then the finance company has the right to repossess the car.
The best thing to do if you have missed a payment is to immediately contact the finance company. If it genuinely happened by accident and you make the payment as soon as possible then you shouldn’t have too much trouble – although some lenders may still charge a late fee.
If you’re struggling to afford your monthly payments then it’s still better to talk to the finance company than to fall behind. They may be able to extend the contract to lower the monthly costs or attempt to find another solution.
Some forms of car finance allow you to hand the vehicle back to the lender once you’ve paid off half the cost. That isn’t the case with leasing; if you return the car, then you’ll probably have to pay off the rest of the contract, which could be several years worth of monthly payments.
Are there any charges at the end of my contract?
If you stick to the mileage limit, look after the car and return it in good condition then there shouldn’t be any excess charges at the end of a lease contract.
However, if you have exceeded the agreed annual mileage limit or if the car has any damage that is considered beyond reasonable wear and tear, then the finance company may charge you. The exact amount will depend on how many extra miles the car has covered (the charge per mile should be detailed in your contract) and the severity of any damage.