How does car leasing work? Leasing explained and why it might be right for you

You’re thinking about leasing a car and want to know whether it’s the right call. That’s a very valid question. No matter what you’re looking for in the market, there are a bunch of financing options available to you, all with their merits (and drawbacks). So, what’s leasing got to offer you?

In simple terms, leasing is the most affordable way of getting behind the wheel of a new or used car every few years. If you’re interested in a new car, it offers you all the benefits of driving one without any of the drawbacks, like the often steep depreciation new vehicles face in their first few years on the road. There are also tax benefits for business customers and some other good bits to consider for both new and used buyers.

That’s leasing a car explained in a nutshell. As for some details, this guide will offer you everything you need to know about how car leasing works, the key thing to consider when leasing a car and an honest assessment of the pros and cons of personal and business contract hire packages.

What is car leasing?

A car lease, otherwise known as a personal contract hire (PCH), is essentially a long-term rental. A typical lease lasts two to four years, during which you make monthly payments to your provider to use the car. Once the lease is up, you give the car back.

The key difference between leasing and other common types of car financing is the lack of ownership. Personal contract purchase (PCP) offers the option to buy the car at the end of the agreement, while hire purchase (HP) comes with the expectation that you’ll own the car at the end of the agreement. With leasing, there’s no option to own the car.

PCH car leasing is a massive part of today’s market, accounting for around 20% to 30% of new car agreements in the UK.

How does leasing a car work?

Here’s how a typical PCH car lease works:

• Initial payment: you can put down an initial payment to lower your monthly payments throughout the lease. You can choose what this amount is. A typical initial payment would be equivalent to three to six monthly payments, but you can pay more or go for a zero-initial-payment option depending on what suits your budget best. Just bear in mind the more you pay upfront, the less you’ll pay monthly – and vice versa.
• Monthly payments: after the initial payment, you’ll pay fixed monthly instalments for the duration of the lease to pay off the rest of the total amount owed. The amount you pay monthly is defined by how much you put down for the initial payment and the duration of the lease.
• Duration of lease: most leases last 24-48 months, but you can go as short as 12 months or as long as 60 months.
• Terms: the lease company providing you with the car is the registered keeper of the vehicle for the entire time you’re driving it. You never own the car, nor do you have the option to. That means you have to look after the car and return it in good condition. As part of your deal, you’ll have an agreed annual mileage limit (you set this) and must adhere to fair wear and tear guidelines.
• End of the agreement: at the end of the lease, you give the car back. If you’ve gone over your mileage limit or the condition of the car is worse than what’s permitted by fair wear and tear guidelines, you may have to pay extra as per your agreement. Otherwise, that’s it – the deal’s done. Most people hop straight into another lease deal on a newer model, but there’s no obligation to do so.

What does a new car lease include?

We can’t speak for every leasing company out there, but you’ll get all of the following included with a new car lease with Hippo:

• Road tax: otherwise known as vehicle excise duty, your road tax is covered for the duration of your lease.
• Warranty: all new cars are covered by their respective manufacturer warranties, which will almost always cover the duration of your lease.
• Breakdown cover: breakdown cover is provided as standard.
• Free nationwide delivery: we offer free delivery to any UK-mainland location on our new car range.
• Maintenance (optional extra): you can add maintenance cover as part of your fixed monthly cost to protect yourself against any unexpected on-road issues.

What does a used car lease include?

Used car lease packages vary widely in what they come with, but all of our cars are covered by our Used Car Promise, which includes:

• 130-point quality check: all used cars in our range have to undergo and pass a detailed 130-point check at our in-house, state-of-the-art prep centre.
• Warranty: we’ll either provide you with a 3-month warranty or whatever is left of your car’s manufacturer warranty – whichever is greater.
• 14-day money-back guarantee: If you change your mind and want to return the vehicle, you have 14 days to cancel the remainder of the payments due (a documentation fee and cancellation fee will apply if you do wish to return your vehicle).
• Maintenance (optional extra): maintenance cover can be added to your monthly cost, which is a great peace-of-mind extra when leasing second-hand.

Is insurance included with a car lease?

The answer is almost always no on a standard lease. You’ll need to arrange fully comprehensive insurance for the duration of the lease.

What are the different types of car lease?

Leasing is an arrangement that will almost certainly work for you and your new car, but it’s not the only one on the table. Personal contract hire is one of a few main types of financing for new and used cars (all of which we offer at Hippo Leasing).

Lease options

Personal contract hire (PCH)

As you’ve read above, PCH is one of the cheapest ways to drive a new or used car. You typically pay an initial payment followed by a series of fixed monthly payments for a set duration – usually 24-48 months. Once your PCH agreement is up, you hand the car back and are free to move on to a new deal or walk away.

Business contract hire (BCH)

Business contract hire is much the same as personal leasing but is made for business owners who want to lease a vehicle through their organisation, either for themselves or their employees. The primary difference between BCH and PCH is that BCH allows the user to claim back up to 100% of VAT, depending on how the vehicle is used. If the vehicle is used exclusively for commercial purposes, the lease is eligible for full VAT relief. If the vehicle is used for both commercial and personal use, 50% of VAT can be reclaimed. Plus, any maintenance package added is eligible for 100% VAT relief.

Purchase options

As we’ve established, there’s no option to buy with lease deals. If you’d like that option, there are two common financing arrangements which offer it:

Personal contract purchase (PCP)

PCP offers a similar structure to a leasing deal but with an option to purchase at the end. You’ll pay an upfront payment (this is usually about 10%) of the vehicle’s value, then a series of fixed monthly payments (these will typically be higher than the PCH equivalent) for the duration of the deal.

At the end of the deal, you have an optional balloon payment which, if you choose to pay it, will give you ownership of the vehicle. The balloon payment is usually a sizeable lump sum to come up with, but there’s no obligation to pay. Instead, you can hand the car back and move on to another deal.

Hire purchase (HP)

With a HP deal, there’s an expectation that you’ll buy the car at the end of the contract (you can usually get out of it, but at a cost). You’ll pay an upfront deposit, then fixed monthly payments for the duration of the deal. There’s no optional final balloon payment – simply the last of your monthlies to pay, then the car is yours. As such, HP deals carry higher monthly costs to evenly cover the cost of the car over the contract period.

PCP and HP deals are useful mechanisms for purchasing a car without having to come up with a hefty lump sum to buy outright. Like PCH deals, they both have their merits and represent the best option for different types of customers. If you want to know more about what PCP and HP packages can offer, give us a call, and we’ll be able to break down what might work best for you.

Car leasing pros and cons

Advantages of leasing a car

• It’s typically the most affordable way to drive a new or used car.
• It’s the most flexible and affordable way to drive a new car every few years.
• Lower monthly costs mean you can get ‘more car for your money’.
• Fixed monthly payments make it easy to budget.
• Leasing new comes with the additional peace of mind of a full manufacturer warranty, with extras like your road tax and breakdown cover included (and you can get a comprehensive maintenance package baked into your deal).
• Lack of ownership means no commitment to the car down the line – no obligation to buy and no worries about depreciation or selling the car.
• Business contract hire options come with notable tax benefits.

Disadvantages of leasing a car

• There’s no option to own the car at the end of the deal.
• Because the car isn’t yours, your deal will have terms, conditions, and restrictions. You must consider annual mileage limits, excess wear and tear, modification restrictions, and various other stipulations. If you fail to stay within these limits, you may face additional fees at the end of your deal.
• There’s no equity in leasing. Your money goes towards using the car for the agreed period and nothing else.
• If you intend to hold onto a vehicle for a long period of time, leasing is generally more expensive than buying.

Key factors to consider when leasing a car

Here’s what you need to ask yourself when weighing up whether leasing is the right call for you:

Do you want to own – or have the option to own – your next car?

If the answer is yes, you’ll want to consider a purchase agreement or buying outright. If the answer is no, leasing offers the best affordability and accessibility to the vehicle you want.

Can you afford to commit to fixed monthly payments (and any upfront costs) across multiple years?

This question applies to any finance agreement you might undertake, but it’s essential you know what lies ahead financially with any lease or purchase plan.

Are you OK with certain restrictions when driving?

Leasing comes with the obligation to keep the vehicle in good condition and adhere to an annual mileage limit. If you’re comfortable with this, you’re good to go. If not, an ownership option may suit you better.

How long do you want to drive your next car?

If you want to move between cars quickly and keep up to date with the latest/better models, leasing is probably the way to go. If you want to hold onto one car for a long time, buying tends to offer better value in the long run.

What does your credit profile look like?

Again, this applies to any finance agreement, but your credit score and wider credit report will have a substantial impact on what types of cars and deals you can get access to. The better your credit score, the more likely you are to be accepted by the lenders we work with on the car deal you want.

However, a poor credit score doesn’t necessarily mean you won’t be able to get the car or deal you want. As bad credit and zero initial payment specialists, we’ve helped thousands of bad credit customers get a deal that works for them. If you’re curious about where you stand, you can use our free soft credit check to see whether you’re likely to be accepted for finance if you do formally apply. Using our eligibility checker won’t affect your credit score*, so you can check worry-free.

How does car leasing work: quick-fire questions

What happens at the end of a PCH contract?

You give the car back – it’s as simple as that. There’s no option to buy with a lease. Assuming you’ve kept the car in good condition and stuck to your agreed mileage limits, you walk away from the contract without paying anything extra and are free to move on to whatever suits you next.

Can I extend a car lease?

Generally speaking, you should be able to extend your lease. You’ll just need to speak to your provider to check how that works and the costs attached.

Can I lease a car with bad credit?

Yes, it’s possible to lease a car with bad credit. You’ll want to speak to a bad credit specialist like us as we work with a panel of lenders who specialise in bad credit financing. We’ll help you find the best deal possible based on your circumstances.

Who is the registered keeper of a leased car?

On a lease deal, the registered keeper of the vehicle will be the provider of your vehicle, as they’re the ones who own the asset (vehicle).

Where can I find out more about fair wear and tear?

A good place to start is the BVRLA’s Fair Wear and Tear Guide.

Is it a good idea to lease an electric car?

Given leasing offers the most affordable route into driving a new car and electric cars tend to carry a high price tag, leasing an electric car is undoubtedly a good way to get behind the wheel of one without going beyond your budget.

Find the best lease deals with Hippo Leasing

Hopefully, you’ve now got everything you need to make an informed decision about leasing a car. If you think it’s the right option for you, we’re here to help you find the best possible deal.

To get started, take a look at our full car leasing range or give us a call and speak to one of our expert account managers. If you want to check your eligibility for finance, you can use our free soft credit check to find out whether you’re likely to be accepted without affecting your credit score*.

*This is a soft credit check that will not affect your credit score. If pre-approval is successful and you wish to proceed, you will be subject to a hard credit check which may affect your credit score. Pre-approvals are conditional and full approval may be denied subject to further checks.