Car leasing follows a trend that is similar to many other aspects of our lives. This trend allows us to obtain certain luxuries by allowing us to pay for on a monthly basis. In the same way, we afford our Netflix accounts, our mobile phones, our gym memberships and so on. Paying for things on a monthly basis is common and that is what leasing offers for car drivers.
Car leasing is suitable for those who want access to a car without necessarily wanting to own it. Leasing agreements allow drivers to drive away with a car without purchasing outright or ever being the legal owner of it. With a lease agreement, the finance provider is the legal owner of the car, but the car is in the driver’s possession.
There are two forms of leasing available: Contract Hire and Personal Contract Purchase. Each feature of the leasing agreement is fully adjustable to ensure that you get the right deal to match your requirements.
Contract Hire and Personal Contract Purchase are fairly similar, but there is one big difference between them at the end. That one difference will likely be the factor that makes you choose between a Contract Hire agreement and a PCP deal.
Car Leasing: The basics
In terms of similarities, leasing and finance agreements run in basically the same fashion. You are given the option to pay a deposit on the car of your choosing. This is followed by a series of monthly payments for the length of agreement you have chosen. Then at the end of the agreement is where the options differ depending on your finance choice. With finance agreements, you take ownership of the car. However, with leasing agreements, you can hand your car back to the finance provider.
With finance agreements, the monthly payments cover the entire value of the car. This is not the case with a car lease deal. With a lease deal, you are paying to cover the depreciation on the value of the car for the period that you drive it. From the moment a car is first driven to the moment you hand it back, that car has lost value. The more miles you drive the more value is lost.
Lease companies try to calculate how much value will be lost over the agreement period and calculate your monthly costs accordingly. This is why each feature in the agreement is adjustable because it depends on your needs such as a deposit, length of agreement or mileage.
Your monthly payments are determined by a variety of factors. These factors include whether you place a deposit or choose to go for a no deposit car lease agreement. The most important factor that determines how you pay is what credit rating you have, whether it be excellent, good, fair, poor or bad. Here are the factors that directly affect the amount you pay monthly.
Credit rating: Bad to Excellent
Length of your lease: 24-60 months
The amount of your deposit
The type of car you choose: New, nearly new & used
Your credit rating
Your credit rating tells a story of your history with credit agreements and therefore is very important for leasing companies. They take it into consideration when it comes to offering you a leasing agreement. The better the credit rating, the less of a risk you are to lease a car to because they can be sure that you can afford to cover the cost of the payments.
This is why your credit rating is the most important factor in terms of determining how much you will pay. If you have a fair to excellent credit rating, you will likely be accepted. Those with poor or bad credit are more likely to be rejected for a prime rate car lease agreement.
However, that doesn’t mean they can’t get car leasing. There are bad credit car leasing options for those with poor or bad credit. The difference between this type of lease and a normal lease is that the interest payable over the course of the agreement is higher.
Your deposit of choice
At the beginning of the agreement, you have a choice to make. Do you pay a deposit, or do you choose the no deposit car lease option?
Both choices have merit. If you choose to pay a deposit, you have three options to choose from.
Three months worth of monthly payments
Six months worth of monthly payments
Nine months worth of monthly payments
The higher the deposit, the more of the agreement you pay off right at the start. This means that your monthly payments will be lower as a result because you have less remaining to pay. This goes for both Contract Hire and Personal Contract Purchase agreements. Placing the deposit is not a requirement, but it remains advantageous to do so if you are looking for lower monthly payments.
However, if you don’t want to pay a deposit, either through choice or necessity, there is a no deposit car lease option. This option results in slightly higher monthly payments as you don’t pay off a large chunk of the agreement right at the start. Instead, the amount of the deposit is spread across the series of monthly payments. As long as you can afford those higher monthly costs and do not wish to pay a deposit, then it is a great option for you.
The length of your lease
One of the most important choices you have to make when leasing a car is how long you want the car for. Car lease agreements last for a period of 24-60 months. The majority of customers find a 48-month agreement the best fit.
The longer the agreement, the more the cost will be spread out, therefore lowering those monthly payments. In basic terms, the shorter the agreement, the higher the monthly payments. However, the longer the agreement, the more interest you will pay on the agreement. This means that whilst those monthly payments are lower, you will pay more overall as a result.
How many miles you will drive
As has been mentioned above, the monthly payments cover the cost of the depreciation on the value of the car over the period of the agreement. That means that the more the car is driven, the more value is lost. This is why you choose an annual mileage allowance at the beginning of the agreement.
The average amount driven a year by Britons is around 9000 miles. The lowest mileage option is 5000, but a good safe point is between 10-12,000 miles per annum.
However, some people do require 40-50,000 miles a year and that will increase their monthly costs. It is something well worth considering when you come to getting your lease agreement agreed.
The right kind of car
When it comes to choosing your car, you have a massive amount of choice. You can choose a brand new car on Contract Hire or you can get a nearly new car that has only been driven for a few months, on Personal Contract Purchase.
If you choose a new car on Contract Hire, you get a car that is customised to suit your needs. You can choose the colour, the optional extras, the type of engine it has and much more. It is your car in all but legal status. However, because it is brand new, it has more depreciation to lose. The time when a car loses its most value is the first three years from the moment it is first driven. That means that a lease agreement on a brand new car has higher monthly payments than a used car lease deal.
This is similar to nearly new cars. However, they will have lost a large chunk of depreciation already. This means the payments will be lower than those for a brand new car. You will not get the choice of what the car is in terms of designing it yourself like you do with a brand new car. However, because it is nearly new, it will still be in manufacturer’s warranty, therefore, lowering the maintenance costs for the car.
Contract Hire is the purest form of leasing available. You never have the choice to own the car. You are leasing it. You can pay a deposit at the beginning. Following that decision, you pay a series of monthly payments for the duration of the agreement. If you choose a CH agreement, you must hand that car back at the end.
This agreement is perfect for those who want access to a car, but don’t want to be tied down with ownership. You simply lease a car for a period of time and hand it back. Simple.
Personal Contract Purchase
PCP agreements are technically a finance option, but it straddles the line between finance and leasing perfectly. It offers the most flexibility and is in many respects a lease agreement. How a PCP agreement works, is the same as a Contract Hire agreement, up until the end. At the end of the PCP, you have two choices. Take ownership with a final balloon payment or hand the car back.
The balloon payment is a Guaranteed Minimum Future Value, which is calculated at the beginning of the deal. It works out how much depreciation will be lost over the lease period and calculates how much residual value will be left in the car. The balloon payment then covers that residual value. If you choose to pay that payment, you can take full ownership of the car.
However, if you do not want to pay that balloon payment, you can hand the car back, like you do on the lease agreement. There is not an additional cost for handing the car back unless you have gone over your mileage allowance or caused excess damage. If you do not want to pay the balloon payment, the PCP just behaves like a CH agreement.
The choice is yours
If you are looking to have access to a car for a certain period of time, leasing is the best option. It doesn’t tie you down and you can hand the car back at the end. If you are sure you don’t want to own the car and will hand the car back, Contract Hire may be the better choice.
However, most people want the option of flexibility. PCP offers that flexibility which is why it is the most popular option available. If you are interested in either agreement, enquire with us and our team will find the best car lease deal available for you.