Car leasing is a financial agreement between a customer and a vehicle supplier, allowing you to drive your chosen car for a fixed length of time at an agreed monthly price.
We understand that leasing can be a complex concept for customers. Here we have simplified and explained everything you will need to know about how leasing works.
How car leasing works
When leasing a car, monthly payments are required. An initial deposit may also be needed, although there are now a lot of new and used vehicle deals available which don’t need a deposit. At the end of the lease period the car is returned, bought or part exchanged based on your leasing type.
Firstly, a contract will be formed with the dealer including the required deposit and monthly payment amounts.
The lease length, the mileage limit and the wear and tear guidelines will all be agreed and stated in the terms and conditions of the contract.
The initial payment at the start of the contract is usually equivalent to three monthly payments. You then continue making the monthly payments for the length of the lease contract.
A greater deposit will result in having lower monthly payments, or vice versa. Monthly payments are calculated with consideration to the value of the car, how long the lease is, the mileage allowance and the estimated value of the car at the end of the lease. For example: On a PCP, you are only paying for the depreciation costs over a set period.
Car leasing costs
When leasing, the agreed monthly payments allow you to budget your car spending. Also, you wouldn’t be hit with the blow of a bulk payment as would be the case when buying a car outright.
For anyone wanting to drive a new car every few years, leasing is a fitting option. It is more than likely you can drive a higher-priced vehicle than you might otherwise be able to afford to buy outright. This is because you only pay for the value the vehicle may lose over your leasing period i.e. if a car is £12,000, but it is believed to be £6,000 after 4 years, then you would pay the difference of £6,000 over 4 years. Whereas, with finance you would pay the entire £12,000.
An issue many car buyers must consider is resale value. Cars are affected most by depreciation in their first three years of ownership. When leasing, this concern would be ruled out for you because it would be the dealer’s responsibility to sell the car at the end of the lease. So, you would not have to deal with the effects of depreciation.
When the car lease ends
Your options at the end of the lease are determined by your lease type. There are 2 main lease types:
PCP - Under a Personal Car Purchase agreement, you have the option to return, part exchange or keep the car. If keeping the car an end value known as the balloon payment will need to be paid.
PCH – Under a Personal Car Hire agreement, before the end of the leasing agreement, you will be contacted by your vehicle supplier to arrange the return of the vehicle. You can simply return the car without any further commitment or extra charges, given the car is returned in the agreed condition and within the agreed mileage limit. Dependent upon the lease type, you may have the option to choose to buy the vehicle or part exchange.
You can see the benefits of PCP leasing here and PCH leasing here.
Another option Hippo offers is HP. With Hire Purchase, you own the car at the end of the lease. The total value of the car is split and paid over the period of the agreement.