How does leasing a car work?
With personal contract hire (PCH), otherwise known as car leasing, you pay a deposit and set up your monthly repayments for a fixed period (typically between two and four years).
The repayments tend to be lower compared to other types of car finance – as you’re not actually purchasing the car. Instead, you pay the difference between the vehicle’s market value when you take out the contract and the expected resale value at the end of your lease term. This is known as the expected depreciation.
Bear in mind though, exactly how much you’ll pay each month will vary depending on several factors, including the:
- type of car you get
- dealership you use
- size of your deposit
- length of your agreement
- annual mileage.
What happens at the end of a car lease?
- Personal Contract Purchase (PCP), otherwise known as lease purchase – where you have the option to buy the car at the end of your agreement by making a lump sum “balloon payment” to cover the difference in the expected depreciation
- Hire purchase (HP) – where your payments contribute to the full value of the car, so you own the vehicle after you’ve made your final repayment. For this reason, the monthly repayments tend to be higher compared to PCP or car leasing
Can you lease a used car?
You can lease a used car, however, one of the advantages of PCH agreements is that you get to use a brand-new car that perhaps you couldn’t afford to buy.
So, it’s less common for people to want to lease a used car, though it is possible. It can sometimes work out cheaper per month to lease a secondhand car, and your insurance premium may also be lower than on a new car.
Read on for the pros and cons of secondhand car financing.
Does car leasing include insurance?
Unfortunately, car leasing doesn’t tend to include insurance. While the leasing company remains the legal owner throughout your PCH agreement - as the user of the car, you are legally responsible for insuring it.
Most leasing companies will require you to take out fully comprehensive insurance, and you’ll need to provide a copy of this before you’re able to drive away.
How to compare deals
There are many different leasing companies out there, who all offer many different deals, so knowing exactly what to look for is essential. Here are some of the main things to consider when comparing deals:
- total cost – don’t be fooled by the figures that companies highlight, like low monthly repayments, as these aren’t the whole story. So do the maths, work out the full cost (the monthly payments times the number of months) plus any applicable deposits or fees
- mileage – with car leasing, the more mileage you do, the higher the cost. But don’t fall into the trap of thinking you’ll be able to massively limit your miles to save money, as you could end up facing hefty fees if you go over it. So, be realistic about the miles you’re going to rack up on the clock per year
- contract length – there are no set rules about which contract lengths are better or worse, but some more competitive deals will only be available on certain contract lengths. So have a play about with this, as you may be able to find a better deal if you’re flexible with the lease term
Is leasing a car worth it?
Whether leasing a car is worth it really depends on you and what you’re looking for. If your priority is to be in a brand-new car and you’re not bothered about owning it, then car leasing could be the perfect solution. But you need to make sure it’s affordable for the full duration of your contract.
If, however, mileage limits are your worst nightmare and you want your monthly repayments to go towards owning a car, then a different type of finance may be better. So, have a think about what your priorities are, and consider these pros and cons of car leasing.
What are the advantages of car leasing?
- you can change cars every few years and always have the newest model
- low upfront cost and low monthly repayments that are fixed for the duration of the contract
- no responsibility when it comes to selling the car at any point, as you don’t own it
- you don’t need to worry about its value depreciating
- if you get a new car on lease, it’s less likely to need repair work than an older model
What are the pitfalls of car leasing?
- you don’t own the car at any point
- if you have a poor credit score, it can be difficult to get approved for car leasing
- your annual mileage is limited, and you can face charges if you exceed the set limit
- you may be charged extra if you don’t return the car in the same condition as when you started the lease
- if you can no longer afford to lease the car, terminating your agreement can be expensive
Alternative types of car finance
If you’re not sure that car leasing is right for you, there are other types of car finance that you may find more suitable.
Personal contract purchase (PCP)
PCP is similar to car leasing, in that you’ll normally need to pay a deposit, followed by monthly repayments (including interest). There is also likely to be annual mileage limits in place.
However, unlike car leasing, there’s the option to purchase the car at the end of the agreement. When your contract ends, you can either:
- hand the car back with no extra cost involved
- pay the final ‘balloon payment’ to become the legal owner
- take out a PCP agreement on another car, using any positive equity as a deposit
Read on to find out more about PCP.
Hire purchase (HP)
HP is a popular option for those looking to purchase a car by spreading the cost out over time. With HP, you pay a deposit, followed by monthly repayments including interest. Unlike PCP agreements, your repayments go towards paying off the full value of the car.
As a result, your monthly repayments tend to be higher compared to PCP and car leasing. At the end of the agreement term, you become the legal owner.
Find out more about HP.
A personal loan may be worth considering if you want to own the car immediately. When you get a personal loan, you receive a lump sum into your bank account, which you can use to pay for the car in one go. This means you own it from the minute you drive it away.
You then repay the loan in monthly repayments (including interest. If you wanted to, you could sell the car at any point – but you would still need to repay the loan.
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