Leasing: How to choose the right mileage allowance

Not sure what mileage allowance to choose for a car lease? Use our guide to avoid inflated monthly payments and end-of-contract charges

Matt Rigby
Apr 25, 2021

Choosing the right mileage allowance for your car finance or lease deal is extremely important. However you pay for your car your car - whether you’re leasing it, or going for a Personal Contract Purchase (PCP) finance deal - the mileage allowance will have a big effect on your monthly payments.

This is because the mileage of a used car is one of the biggest factors in determining its value. In simple terms, the higher mileage a car has, the less it is worth. Since lease cars are owned by the leasing company, this means that the more miles you drive, the less the car is going to be worth to the leasing company when you hand it back at the end of the contract.

This means the car will be worth less to the company when it comes to sell the car on once the contract has ended. Therefore, to help the leasing company cover this cost, it will charge you more per month to lease the car. As a result, low mileage allowances typically mean lower monthly payments, while going for a higher mileage allowance bumps up the monthly cost.

Don't think you can simply ignore the mileage allowance either; if you do go way over the allowance, the leasing company is likely to charge a per-mile penalty, when you hand the car back, for going over the limit specified in your lease contract.

Of course, if you end up covering fewer miles than you expect, the car could be worth more to the leasing company than expected at the end of your contract. You won't get any refund for being way under the mileage cap with a lease, though. So if your circumstances change and you’re not driving as many miles as you thought, it’s worth contacting the leasing company to see if you can get a reduced monthly payment by moving to a lower mileage allowance.

Why mileage matters in a leasing deal

Mileage is important in a lease because it is the biggest factor in determining a second-hand car’s value. The higher the mileage allowance on a lease deal, the higher the monthly payments need to be, because there will be a bigger difference between its value when you get it and what it’s worth at the end of the lease term.

This is effectively what your monthly payments on a lease deal cover; the predicted drop in value of the car you are leasing over the length of the contract. The reason for this is that the leasing company always owns the car you are running. You are effectively renting it from the company. When the company sells the car at the end of your contract it needs to be sure the revenue from the lease term - in other words the total of what you’ve paid over the entire lease - equals more than the drop in value of the car.

For you as a customer, this means it’s important to calculate your expected annual mileage as accurately as possible. If you estimate that you might drive more miles than you actually end up doing, you could be paying unnecessarily high monthly payments. Conversely, if you underestimate how many miles you drive when you take out a lease agreement, you could end up paying significant penalty charges for exceeding the agreed mileage limit specified in the lease. These are typically higher than the cost of simply going for a higher mileage lease.

How to calculate your annual mileage

If you’re unsure how many miles you drive per year, the chart below should help to give you a rough indication of your annual mileage based on your weekly and monthly driving distances.

As a rough rule of thumb, the average annual mileage for drivers in the UK is well under 10,000 - in fact some estimates suggest it could have dropped as low as 6,000 due to the effects of the 2020 coronavirus pandemic.

However, it’s well worth working out your own mileage based on your personal situation, as you may cover far more miles than average if you have a long commute or live in a rural location, where simply going for the weekly food shop or taking children to school and back could account for thousands of miles per year by themselves. 

If in doubt, it's wise to choose a slightly higher mileage figure than you expect to cover. This gives some leeway for carrying out a number of unexpected journeys and should cost less than having to pay the same amount of excess mileage charges if you chose a lower limit and exceeded it. The table below is based on the assumption that the majority of your miles are covered on a five-day commute each week.

Average daily mileage

Average weekly mileage

Projected annual mileage

15

75

4,000

20

100

5,200

30

150

7,800

50

250

13,000

75

375

20,000

100

500

26,000

What to do if your circumstances change

If your personal circumstances change, then you should get in touch with the lease company. This is particularly important if you think you might exceed the agreed annual mileage limit, or if you are struggling to meet monthly payments, as you will be charged penalties for going over the mileage limit and you could be at risk of losing the car if you fail to meet monthly payments.

It’s also possible to reduce your monthly payments if you find you are covering fewer miles than you expect - as was the case for many drivers during the coronavirus pandemic lockdowns. This is always at the discretion of the leasing company but, as Chris Evans, Head of Consumer Experience at our partners Leasing.com, discovered, you can potentially save a great deal of money by moving to a lower mileage allowance. He saved more than £70 per month on the lease of his car by reducing his annual mileage limit to 5,000 miles from 8,000.

 

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