Car leasing: All you need to know
It’s an age old question: ‘Should I buy or lease a car?’ This article will shed some light on what vehicle leasing is, and why it may or may not be for you.
So, what is car leasing?
Owning a car is one of the biggest responsibilities one makes in life. As such, coming to the decision of what car to get is a big one and understandably daunting for some. Also, how you are going to pay for your car is something everyone should carefully consider. But, if you don’t buy a car, did you know leasing a car is always an option? So what is leasing? And why should I lease a car? A lease in simple terms is:
a long-term rental agreement, this offers exclusive use of a car for a set period of time and you will pay for it monthly which makes it a lot easier and cheaper in the long run
Leasing has many benefits, some of which are: it provides freedom from the negotiation of part exchange prices and lets you change your vehicle every time you take out a new car lease. This means you can avoid maintenance costs associated with running an older or second hand vehicle.
How does car leasing work?
The way vehicle-leasing works is that you can pay an agreed sum of money by way of monthly instalments on an agreed period, making it easier and more convenient for you when getting a new vehicle in the long run.
Depending on the contract you decide to take out you may be required to put down a deposit at the beginning of your lease, but an alternative is that you can make a lump sum payment at the end.
Desperate for that new car, but can’t afford to pay the big upfront cost of buying a brand new vehicle? Vehicle leasing may just be the change that you need for your life on the road.
But how do I know if leasing is for me? Well, most people in the UK change their car every 3 or 4 years. If that applies to you, leasing may be a much more cost-effective option and may turn out cheaper in the long run.
Different types of car leasing contracts
Contract hire, often referred to as car leasing, is perhaps the most popular form of a vehicle leasing contract available on the market today. This agreement allows a driver to drive a vehicle for a set period of time, but the driver will never actually own the vehicle. Typically, a monthly payment plan is set up for the length of the contract, on completion of which the vehicle is returned to the hire company.
Instalments will be decided by an array of different factors, the primary one being the retail cost of the vehicle. Another determining factor is the expected value of the vehicle at the conclusion of your contract. This value takes into account devaluation, expected mileage and other contributing factors. Payments are decided by the variance between these two figures; so higher residual values lead to lower monthly payments.
The pros and cons of contract hire are largely subjective and will very much depend on the individual. For instance, not having possession of the vehicle can be a sticking point for some individuals, but it can be a blessing for those who do not wish to deal with re-sales and depreciation concerns. Many contract hire arrangements will also come with maintenance packages; so all you have to be concerned about it your comprehensive car insurance and running costs.
The Pros & Cons of Contract Hire:
- Fixed-cost motoring, allowing you to stay in control of your payments and budget effectively.
- VAT registered businesses will also find this option beneficial as they can claim back 50% of their total payments and 100% of all maintenance expenses
- Hire rental tax allowances can also be harnessed.
Personal Contract Hire:
Personal contract hire (PCH) is fundamentally equal to ordinary contract hire but it is only available to private individuals. This represents the most common form of leasing and is what most people refer to as ‘car leasing.’ With a PCH agreement the customer takes control of a vehicle for a set period of time, but never actually owns the vehicle outright.
Instead, once the fixed monthly payment plan has been completed and the contract comes to an end, the customer simply returns the vehicle to the leasing company. Alternatively, you can also take out a fresh personal contract hire lease.
With this type of agreement, the customer does not need to concern themselves with the re-sale value of the vehicle; it is simply returned to the leasing company. Your monthly payments are determined by the difference between the value of the car and the residual value of the car. The latter value takes into account depreciation and a strict mileage limit; going over this limit can result in penalties and charges at the end of the contract.
If you are a business owner, this is probably not the most ideal option for you. Regular contract hire has VAT benefits and other advantages that are not applicable to PCH. On the other hand, private individuals may find personal contract hire perfect; depending on their circumstances.
If you do a lot of travelling the residual value of your car will plummet and therefore increase your monthly instalments. Nevertheless, PCH provides fixed monthly payments and the option to take away a new car every couple of years. As long as you do not mind sacrificing ownership of a vehicle, personal contract hire could be ideal solution for you.
The Pros & Cons of Personal Contract Hire:
- Fixed prices with no interest charges – on both new and used cars.
- Monthly rentals are generally lower than those of a personal loan.
- Road fund licence should be included in the contract.
- Most PCH agreements allow an optional maintenance package to be added.
- No need to worry about depreciation or selling the car when contract is complete.
- Access to high-spec cars that may previously seem unaffordable.
- You will never own the vehicle.
- As the car is not owned by you, third party car insurance is not an option.
- No option to purchase the vehicle at any point during the agreement.
Car leasing might not be for you!
As to be expected, leasing a car isn’t for everyone. One of the main downsides to leasing is that you don’t actually own the vehicle. Alternatively, you can buy the vehicle at the end of the leasing period but bear in mind that this isn’t always an available option because not all vehicle-leasing deals and contracts will allow this.
With car leasing, you can only do a nominal amount of miles which are set by you in the quoting process. Going above this would add an extra charge, however you can amend your mileage whilst your lease is live should you anticipate you might go over.
Leasing also requires good credit. So if you have bad credit then leasing is definitely not for you. You need to have a decent level of credit and a stable financial situation to be eligible for leasing.
Customising your vehicle is a big ‘no’ when leasing, as when your leasing period is up — depending on the contract you have chosen — you will need to return the vehicle in the condition you received it.
If you’d like to mod it, you can of course choose from a list of manufacturer extras to specify the car how you want it. Significant damage will be penalised at the end of the contract, so when the vehicle is returned and damage is found expect extra costs to be added.
Minor stone chips and fair wear and tear are allowed, and you are covered by the BVRLA’s Fair Wear & Tear Guide.
Buying a car: the alternative:
Buying a car can be a long and tedious process. Finding that right car for you after reading endless car reviews online.
On top of this, finding a way to get your vehicle home, any running costs that may creep up, and problems with the vehicle in the future may push your dream car just out of reach. With any vehicle you can have problems, but you are more likely to encounter problems buying second-hand.
Although buying a vehicle may appear cheap initially and gets you on the road quick, you never know the vehicle’s full history and if it has been treated well.
Older or used cars may have had many previous owners and done a lot of miles before you even sit in it. Not to mention, as soon as you purchase a vehicle the value depreciates rapidly and getting rid of it when it’s time to buy another car could prove to be difficult.
Overall it’s what works for you. If you can afford to buy a new car, then fantastic! But it’s what works best for you and what best suits your lifestyle. If you prefer to buy a new car and then have it for the next 5-10 years then great. But if you prefer to have a new car every 2-5 years then leasing may be for you.