Our Complete Guide To Car Leasing

Last Updated: 28th Jun 2017
Our Complete Guide To Car Leasing

28th June 2017

There was once a time when, if you wanted a car, you had to save up and buy it outright with a lump sum.

This was great for many of you who had well-paying jobs and could save plenty each month to go towards this car. However, for others, it was a struggle due to low wages or prioritising money for other aspects of your budget such as a mortgage or child costs. It was a restriction for many.

However, everything has changed. Car manufacturers and dealers now rarely market their cars by the full costs of the vehicle. Instead, they sell you a car by how much you will pay on a monthly basis. This comes in the form of leasing and finance options. These options have opened up the car market and made it easier for drivers to acquire cars.

Car Leasing arriving in the UK

Early in the 1990s, car leasing arrived in the UK. Ford tried it first by introducing Personal Contract Hire, however, it was too expensive to catch on. But it did set a principal and other businesses attempted to find ways of making car leasing cheaper.

Initially, it was big businesses leasing large fleets because it helped lower their budgets. Smaller to medium-sized businesses were excluded and individuals could not afford the costs set by the banks and other vehicle brokers.

Eventually, because the price of buying a car outright become too expensive, car manufacturers and dealerships had brand new cars sitting on their forecourts for six months at a time. This meant a radical change was required. Dealers offered discounts to drivers who purchased these cars on a monthly cost rather than outright.

Rise in popularity

Over the past two decades, our economy has changed. We no longer purchase items and services outright as a norm. Instead, we make purchases on a monthly basis. Think of the likes of Netflix, your gym membership, the buy-now-pay-later accounts like Argos and Very. Paying for services and items on a monthly basis is the norm and this tells the story of how car leasing became popular.

When we moved towards a monthly payment economy, it became clear that it was easier to budget for such items rather than saving up for a long period of time to pay in a single payment. The car industry couldn’t afford to be left behind and focused on marketing car leasing to the masses.

But now that car leasing has increased in popularity, the question of how it all works needs to be answered.

What is car Leasing?

In the most simple of terms, car leasing is the long term rental of a car. However, it is never that simple. Car leasing and finance offers similar deals for drivers, but with different outcomes at the end.

Car leasing and finance works by you choosing to place a deposit down followed by a series of monthly payments that cover the cost of the agreement. When the lease comes to an end, depending on the option chosen, you will have a choice to make.

The types of car leasing and finance available are Personal Contract Purchase, Contract Hire and Hire Purchase. All three options are available for personal use and a way for businesses to acquire their fleets.

Young driver happy to lease a car

How does car leasing work?

In general terms, car leasing works by you enquiring on a car and being credit checked by the lender. Most lenders will conduct a hard credit check to discover your credit rating and your credit history. This is so the lender can judge whether you are eligible for car leasing and finance.

Once they have decided whether to accept you, an account manager will work with you to decide what deposit to place at the start, how much to pay per month, how long you want to lease the car for and what to do at the end.

A deposit is not necessary and no deposit car leasing is an available option (more on that later),although it is advantageous to pay one. The length of your agreement is chosen by you. Lease deals are between 24-60 months, with most customers opting for 48 months.

For each year you lease the car for, you must choose an annual mileage allowance that states how many miles you will drive each year. If you return the car at the end of the agreement with more mileage than agreed, you will pay a penalty for each mile over. The amount you will pay as a penalty is set by the individual funder of your agreement. It is important to estimate your annual mileage correctly to ensure you don’t pay additional penalties.

When the agreement comes to an end, you have different options. Car finance allows you to take ownership of the car, whilst leasing requires you to return the car to the lender and move on. Personal Contract Purchase (PCP) sits between those two options.

Contract Hire

Contract Hire is the simplest form of car leasing. With this option, you pay to lease the car and when it comes to an end, you hand the car back. It is that simple.

Contract Hire works by you paying off the depreciation of the vehicle over the duration of the agreement. This is different to car finance that pays off the whole value of the car. A new car’s value depreciates from the moment they are first driven out of the showroom onto the road. In some cases, they depreciate by 20% immediately.

Lenders estimate how much value a car will lose over the agreed period and that is the value you will be required to pay off. If you choose to pay a deposit, you can get rid of a large chunk of that value. This will lower your monthly payments for the remaining months.

As has already been mentioned, when it comes to an end, you hand the car back, without the option of owning the car.

Hire Purchase

Hire Purchase is not leasing, it is car finance, but for greater understanding of the differences and options available, we have included it in here. Hire Purchase is the direct opposite of Contract Hire.

With a Hire Purchase agreement, you are paying off the full value of the car over the agreement period. This means that when it comes to an end, you will be the sole owner of the car without the option of returning it.

This means that your monthly payments and deposit will be higher under a Hire Purchase agreement because the value of the car will always be higher than the value of depreciation. However, apart from that major difference, HP agreements work the same as Contract Hire agreements, with you placing a deposit down, followed by a series of monthly payments.

Personal Contract Purchase

Personal Contract Purchase (PCP) is the most popular form of car leasing and car finance because of how flexible it is. PCP deals are classed as both car leasing and finance due to the options offered to the customers when it comes to an end.

PCP gives you the option to hand the car back or to make a final payment at the end to take ownership of the vehicle. The final payment is a balloon payment, which covers a substantial amount of the vehicle’s value.

PCP deals work by the lender breaking down the value of the car into three parts. First, you have the deposit, which is optional. Next is the series of monthly payments. These monthly payments work similar to Contract Hire payments in that they cover the cost of the depreciation over the agreed period. Finally, there is the balloon payment, which equals the Guaranteed Minimum Future Value (GMFV).

The Guaranteed Minimum Future Value is calculated at the beginning and is an estimated value of the car after it has depreciated during the lease period. This means the GMFV is calculated after you have decided the length of your agreement and your annual mileage allowance.

The longer the lease and the higher the mileage allowance, the lower your GMFV will be due to the car’s value depreciating more than it might otherwise. That being said, whilst the GMFV would be lower, under those circumstances, your monthly payments will be higher.

When the lease comes to an end, you have the choice of paying off the balloon payment. This can be done through a lump sum or you can take out a finance agreement to cover the cost. You are the legal owner of the car if you choose to follow that route. If you choose to hand the car back, you do not pay any extra and move on.

The different aspects of Car Leasing

Car leasing is a multi-faceted agreement that can be customised to match your needs and desires. This is why you go through a credit check to see if you are acceptable and why paying a deposit is optional and so on. To give you a full understanding of each aspect of a leasing agreement, we have compiled a list of different types of agreement that cover what you can get.

Bad Credit Car Leasing

The monthly payment economy is also known as the Credit Economy. We purchase items on credit and pay them off over an agreed period. This works for the annual gym membership and our credit cards. It also works for car leasing and finance because until you own the car or hand it back, the car is being lent to you on credit. This is why lenders require a hard credit check before you can be accepted for a leasing or finance agreement.

Credit Score

Your credit score is a rating of how well you have managed your credit history. According to Experian, it is calculated with 0 being the worst score and 999 being the best. Your credit score is split into five separate categories.

  • Bad Credit – 0-560 – This is the bottom of the ladder and is seen as a very high risk to lenders and will struggle to get a normal leasing or finance agreement.
  • Poor Credit – 561-720 – Those with poor credit are still seen as high risk and therefore are still likely to be rejected for a normal agreement.
  • Fair Credit – 721-880 – Those with fair credit are judged as moderate risks and therefore shouldn’t experience any problems.
  • Good Credit – 881-960 – These people are seen as low risk and will be accepted for leasing and finance agreement.
  • Excellent Credit – 961-999 – These are judged to be the most trustworthy and will face no trouble when choosing any kind of leasing or finance agreement.

Hippo Leasings guide to Your Credit Score

If you have bad credit

For those of you with poor or bad credit, you may feel as if you cannot lease or finance a car. In the past, that would be true. However, it is no longer the case. Thanks to the introduction of bad credit car leasing agreements, you can be accepted for leasing and drive away with a car.

This is because we understand that life isn’t a straight line and you can be hit by financial troubles entirely beyond your control. That doesn’t mean you should be barred from getting a car if you can afford it.

Because those on bad credit car leasing deals are seen as higher risks, the interest rates on the agreement will be higher. This results in higher monthly payments, but if you can prove that you can easily pay them, you are more likely to be accepted.

Those who do not wish to pay a deposit

There has been much mentioned about paying a deposit at the beginning of your agreement. But it isn’t mandatory. It is advantageous to pay off a large chunk of the agreement at the start as it lowers the monthly payments, making it more affordable on a monthly basis.

You have the option of paying the deposit three different ways:

  • A deposit worth three months of monthly payments
  • A deposit worth six months of monthly payments
  • A deposit worth nine months of monthly payments

The higher the deposit you choose to pay, the lower your monthly payments will be.

However, for those of you who choose whether through circumstance or choice, to not pay a deposit, that chunk of money will be spread evenly across your agreement. This results in a slight increase in your monthly payments. This can be done through a no deposit car leasing agreement.

No deposit car leasing

The difference between a normal car leasing agreement and a no deposit car leasing deal is that you are only paying the monthly payments (and a possible balloon payment if you opt for a PCP deal),which will be higher. Other than that, everything remains the same.

If you are on a bad credit car lease, you also do not need to pay a deposit. Again, as long as you can prove that you can afford the slightly higher payments as a result of not paying the deposit, you will likely be accepted.

Leasing new cars

There can be the confusion that leasing is only available on used cars. This is not true. Brand new cars personalised to you can be leased from the manufacturer through Hippo Leasing. This is done through a Contract Hire agreement, allowing you to drive it within three months.

Vauxhall Corsa in red

With these cars being brand new, they have the highest value, but that also means that they depreciate the quickest. In the first three years of a car’s life, they depreciate the fastest, with some cars losing up to 50% of their value. This means that leasing a car when it is brand new is the most expensive time to lease because if you are covering the value of depreciation, the cost will be higher.

That isn’t a bad thing because by paying that little more for a brand new car, you would reduce your maintenance costs to a minimum due to it being brand new and covered by warranty.

Leasing used cars

With new cars depreciating quickest, this means that when you come to lease a used car, they are far cheaper as a result. The lower the value of the car, the less value it has to depreciate. The lower the depreciation the lower your monthly lease payments will be.

This means that used cars are cheaper to lease, especially if the car is older than three years. However, you have to factor in maintenance costs that could balance the cost scales. Many manufacturers like Kia have long manufacturer’s warranty, meaning your used car will still be covered even after three years, so a used car might be the better option.

Prestige Car Leasing

There is a perception that car leasing is only for the affordable cars on the road, but that isn’t true. For those of you with the money and the interest in Prestige cars, leasing is still an option. It works the same way, but if you don’t want to purchase a prestige car outright and you want to make it more affordable, car leasing is the appropriate way to go.

Rolls Royce in our showroom

The Benefits of Car Leasing

Car leasing is fast growing to be the most popular option of choice for drivers when choosing their new cars. The benefits of car leasing are wide-ranging, ensuring that drivers have a hassle-free experience when it comes to choosing their car.

More Affordable

As has already been explained, car leasing works by paying off the value of the depreciation loss on the car over the agreed period. Because the value of depreciation is always lower than the value of the entire car, car leasing is cheaper than both purchasing a car outright or through car finance.

This leads to car leasing being the most affordable option. It delivers lower deposits at the start of the agreement. It delivers lower monthly payments than you find on car finance agreements. With a Contract Hire agreement, there is no end payment and with PCP agreements, you have the option of buying or returning. This means that anyone can get the cars they desire.

In fact, because a car leasing deal relies upon the value of the depreciation to calculate how much you will pay, you can afford to stretch your budget further than you would on a car finance deal. If you have a budget of £200 per month for example, on a car finance deal, you could afford a city car or small hatchback. But with a car leasing deal, you can spread your budget out further, giving you more choice.

No depreciation worries

Whilst car leasing agreements are calculated due to the depreciation loss over the agreed period, the driver isn’t otherwise affected by them. When you purchase a car either outright or through car finance, you are the owner of that car. That means that whatever happens to it is down to you. That includes the effect of depreciation on the car.

With car leasing, that is a very different story. Because you hand the car back when the agreement comes to an end, you are not in control of what happens to the car after that. That means that you are unaffected by the depreciation of the car. Instead of having to sell the car after a certain period of time and making a loss because of the depreciation, you don’t have to worry about that at all.

This is why PCP deals offer you more flexibility. You are given a choice depending on how much you like your car. You can hand the car back. However, if you really like the car and are willing to deal with the depreciation loss later on when it comes to moving on, you can purchase the car through the balloon payment.

Car leasing offers a hassle-free way of acquiring a car and driving it without ever having to worry about selling it for a loss. The same cannot be said for car finance or purchasing a car outright. It all depends on your priorities.

Flexibility

Personal Contract Purchase is the most flexible option available when you come to choose a car. You are given more choice about what you can do than you do with Contract Hire, Hire Purchase or buying a car outright.

None of us can see the future and whilst we may feel secure in our circumstances in the present, we have no idea if that will remain the case in the future. With that in mind, it seems like a sensible decision to give yourself some flexibility when it comes to your car. After all, your car is one of the major investments in your life.

When a Personal Contract Purchase agreement comes to an end, you have the choice to return the car or pay off the balloon payment and take ownership. This flexibility explains why PCP agreements are the most popular choice when it comes to people acquiring their cars. If flexibility is a positive for you, then car leasing is the option to follow through a PCP deal.

Car ready to be driven away

Drawbacks of car leasing

Nothing is perfect. How can it be when it is designed by humans and therefore will be flawed because we are not all the same. What is perfect for some of us will be a nightmare for others. Car leasing sets out its stall and offers a certain type of way to acquiring a car. For some, it is the best way and for others, it is not. These are the drawbacks some of you see when it comes to car leasing.

You don’t get to own the car?

Above, we were extolling the merits of not having to own the car because you avoid depreciation concerns. However, for some of you, depreciation isn’t a concern and owning a car is a priority. This can be a drawback of car leasing. I won’t repeat how car leasing usually results in you handing the car back, but if you are looking to own a car, then car finance is the way to go.

This can be done through Hire Purchase and isn’t possible with Contract Hire. However, as has already been highlighted, Personal Contract Purchase offers you the flexibility of both. If ownership is what you want, then PCP might be the best choice to follow. But if you are certain about your car and your desire for full ownership, then Hire Purchase is the path to follow.

Penalties

Whilst in general, car leasing is affordable and far cheaper than car finance, there is still a risk of penalties. There are two sorts of penalties that usually hit drivers. The excess mileage penalty and the wear and tear penalty.  However, there is a third potential penalty that depends entirely on your lender.

Excess mileage

When you start your leasing agreement, you decide on how many miles you will drive for each year of your lease. This is to help calculate the Guaranteed Minimum Future Value for a Personal Contract Purchase agreement and how much depreciation the car will suffer over the period of the agreement due to mileage.

This means you are required to stick within the annual mileage allowance that you set yourself at the start. If you go over, you will face penalties for excess mileage. The amount you will pay for each mile over the allowance changes depending on the lender. This can add up to a large amount if you are not careful. This is because the more miles you drive, the more your car depreciates and the less it is worth when you return the car. So, aim to stick within your mileage allowance.

 Wear and Tear Guidelines

Car leasing deals are based on depreciation of the car and one of the main factors in terms of depreciation is the state of the car when it is returned. Every lender, including us, has wear and tear guidelines that allow us to judge the condition of the car when given back to us.

These guidelines set out what should be expected from a car after several years of use. In simple terms, as long as there is no serious or long term damage to the car, you will not have to pay any additional penalties. However, if there is serious damage, you will be required to pay such penalties to cover the cost of repair.

Early return fees

If you decide you want to return your lease car early, you may be required to pay early return fees. This will depend on your lender and whether you are required to pay early return fees instead of just continuing with the lease. But more on this next.

Upgrading and cancelling

 Many of you ask what happens when your leasing agreement comes to an end. “Can I upgrade my car?” or “What happens if I want to cancel my lease early?” are relevant questions and we have the answers for you.

Agreement over car leasing made

Upgrading your car

In terms of upgrading your car when your lease ends, it depends on which lease you have chosen as to whether you can upgrade directly. With a Contract Hire, the chance to upgrade directly is not available. However, once you have handed the car back, you can immediately move onto a fresh car lease if you have enjoyed your previous experience.

However, with a Personal Contract Purchase agreement, you have the option to upgrade. PCP agreements have a Guaranteed Minimum Future Value that is payable through a balloon payment at the end of the lease. This value is calculated at the beginning of the agreement as an estimation of how much the car will be worth by the end.

However, there are times when the car will be worth more than the GMFV is. This gives you an opportunity to part exchange the car and uses it as an upgrade.

For example:

  • Your car’s GMFV is worth £7,000.
  • Your car is actually worth £10,000 when you take it in for a part-exchange.
  • The GMFV is paid off and the remaining £3,000 is used as a discount on your new car.

This can only really be done if your car is worth more than the GMFV when your lease comes to an end. Otherwise, you will have to hand the car back or pay off the balloon payment in full before considering getting a new car.

If you pay off the balloon payment in full and take full ownership of the car, you can then use the car as a part exchange for a new agreement. However, this is not a direct upgrade as you have ended your previous lease first.

Settlement fee

Circumstances can change and that means you may need to end your lease early. There is a way of achieving this and it is a settlement fee. This is available through both the Contract Hire and Personal Contract Purchase agreements.

A settlement fee works by you paying off the remaining cost of the agreement in one lump sum and moving on. This can only be done when you are more than half way through your lease agreement because it means you have proven your commitment to the agreement.

With Personal Contract Purchase, it isn’t as simple. Like if the PCP agreement ended when it is meant to, you have a choice, the same goes for a settlement fee. If you want to hand the car back, you pay a settlement fee that covers the cost of the remaining lease payments. However, if you want to take ownership of the car, you have to pay the remaining payments and the remaining GMFV balloon payment in one lump sum to close your lease early.

Car Leasing for business

Car leasing isn’t just for personal use. It started out as a business option before it rose in popularity. It allows businesses to acquire cars at an affordable rate without tying them down to the cars they chose. Car leasing for business works very much like personal car leasing, however, there are a few differences.

Business fleets

Businesses can lease whole fleets of cars for their businesses. However, each car in that fleet needs to be leased separately. That doesn’t mean you can’t order them all at the same time. But each car must have its own independent leasing agreement.

This set-up allows for you to alter and add to your fleet when you need to. If you decide you need fewer cars, you can end a lease early through a settlement fee. That might not be as easy if all your fleet were under one agreement, which is why we offer them each individually. It gives businesses the flexibility they require.

It also means you can make each agreement unique for the requirements of your staff. Each lease agreement requires an agreed length of lease and an annual mileage allowance. If they were all under one agreement, that would again stop the business having the flexibility it requires. Each employee using the leased cars may drive a different number of miles a year, depending on their job role and requirements, which can be decided at the beginning of the agreement.

Business car leasing is all about offering flexibility for businesses that they do not otherwise get from car finance or purchasing cars outright. With car leasing, you can hand the cars back like with Business Contract Hire and move on or through Business Contract Purchase (BCP),you can pay off the balloon payment for any number of cars in your fleet and take ownership of them. But cars aren’t the only vehicles available for leasing.

Van leasing

Alongside cars, we lease vans for businesses. Vans can be leased for individuals working for themselves or a fleet of vans for a larger business. Leasing for vans is the same as it is for cars. You choose the vans you want for your business and follow that up with an enquiry.

White van leased for business use

This is where as a business, you decide if you wish to place a deposit down on your van at the start of the agreement. This is followed by you choosing how long you wish to lease the vans for and what your mileage allowance should be. Finally, you decide if you want to lease your van through Business Contract Hire or Business Contract Purchase.

No deposit leasing for businesses

Whether you are leasing cars or vans for your business, a deposit is not mandatory. You have four options when it comes to paying a deposit.

  • A deposit worth three months of payments
  • A deposit worth six months of payments
  • A deposit worth nine months of payments
  • No deposit leasing

If you choose not to pay a deposit, whether, through choice or necessity, can still get you a lease deal for your business. Instead, you simply pay the series of monthly payments for the duration and if you choose the BCP option, you can make a decision at the end of the agreement in terms of returning or paying off the balloon payment.

Tax & Insurance

There are many questions about vehicle tax, car insurance and GAP insurance with many of you wondering if we supply it or how each of them affects your lease agreement.

Vehicle Exercise Duty

Vehicle Exercise Duty, commonly known as Road Tax is required for you to drive the car on the road legally. The amount you pay is determined by the emissions produced by the car. The more CO2 emissions produced, the higher you will pay in VED.

In April 2017, there was a change in VED so that every car registered for the first time after April, that produces emissions must be taxed, whilst electric cars do not cost a penny to tax. Every used car registered before April 2017 is on the old VED system, so, when it comes to choosing your car, check how much tax you may be required to pay.

In terms of your agreement, it depends on which option you have chosen as to whether you will have to pay vehicle tax or not. If you lease a car through Contract Hire, you will not be required to tax the car yourself. This is because the car is not legally in your ownership. It remains with the lender and they have to tax it to keep it on the road. That gives you one less thing to worry about.

However, if you are on a PCP deal, you are responsible for paying the VED. This is because you have the end option of paying the balloon payment. This means, in the eyes of the government, that you are paying towards ownership regardless of whether your intention is to hand the car back or not. This means that you have to pay the VED annually for the car.

Insurance

This is a question that is often asked and the answer is no. However, insuring a leased car is simple and easy as it is to insure any car. It works exactly the same way. You can insure a lease car with a Fire & Theft option, a Third Party option or a Fully Comprehensive option.

Use a comparison website or contact insurers directly if you want to get a quote. Most of you will have done it before and will know the exact procedure.

GAP insurance

Cars depreciate as soon as you drive off the forecourt. This means that a year down the line from when you first leased it, it will be worth less. Now imagine you have an accident and the car is written off. If you need to get a replacement vehicle, there will be a gap between the amount the written off the car was worth at the time of the accident and the worth of the replacement car.

GAP insurance ensures that the gap in value is covered and that you do not lose out. Hippo Leasing offers GAP insurance when you lease your car because we don’t want you to miss out if something happens. In theory, your normal insurance should cover a replacement car if an accident does happen.

Warranty and Maintenance

Manufacturer’s Warranty

Car manufacturers have been extending their warranty for a year now because they understand that it is an important factor in choosing what car to acquire. For example, KIA offers a seven-year warranty on their cars, so if anything serious occurs to the car that is no fault of yours or any other driver, the car will be repaired free of charge.

This isn’t much of a concern when you come to leasing a brand new car through Contract Hire because the cars will be covered automatically under their manufacturer’s warranty.

However, that is not the same for used cars. If a car is leased whilst still in manufacturer’s warranty, it will remain covered until that warranty runs out. Now, if you lease a car that is no longer covered by manufacturer’s warranty, Hippo Leasing offers a three-month complimentary warranty, but after that, the car will no longer be covered. If you want your car to be covered after it has run out, you can extend the warranty by paying an extra amount.

Car being serviced

Maintenance packages

Hippo Leasing is based in Blackburn and we have a state of the art Preparation Centre and Body Shop to ensure your car is maintained and repaired. If you live in Blackburn or the surrounding area, We do offer maintenance packages for you to purchase when you lease a car. That means if you need your car repairing and warranty doesn’t cover it, you will be able to bring it to us and for us to repair it.

Now that you know all about car leasing?

Are you tempted to lease a car?

If you are, browse our website and find a car that suits your requirements and enquire with us. Our dedicated team will work with you to find the right deal for you. That can include a deposit or it may not. The lease length will be chosen by you, as well as how many miles you will want to drive a year.

Enquire now and drive away in as little as one day.

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