How to reduce the cost of a car lease

Leasing a car can be one of the most affordable ways to drive a new vehicle. However, working out how to reduce the cost of a lease can still make a big impact on your finances. Those extra pennies and pounds saved every month can go towards family meals out, a holiday or even simply make it easier to pay spiralling energy bills.

Alternatively, using your whole budget and taking advantage of rock-bottom lease costs can make it possible to drive a more desirable car than you imagined - potentially enabling you to trade up to an SUV over an ordinary hatchback or to go for something sportier than you may have anticipated.

There are a number of fundamental components that you need to get your head around in order to know how to decrease the cost of a lease. To facilitate this, we have mapped out a number of sections below that cover these core areas. Keep reading and you should be able to gauge how these elements impact the cost of a lease and also understand the pros and cons of manipulating them to your advantage.

Factors affecting the cost of a car lease include the mileage allowance you agree to - the higher this is, the higher your monthly payments will be - and the length of the contract - typically, longer contracts result in lower monthly payments, though this isn't always the case.

Go for a lower mileage allowance

The basis for any lease deal is the initial cost and the expected future value of the car at the end of the contract. It follows then, that a higher mileage car will be worth less at the end of a lease than a lower mileage car that is otherwise identical. As a result, when you are selecting the terms of a car lease, reducing how many miles you anticipate driving each year will save you money.

To give an indication of figures, reducing the mileage from 10,000 miles to 5,000 miles per year can shave around 10% off monthly payments. So, a car that might be £500 per month on a 10,000-mile-per-year contract may drop to nearer £450 per month.

The biggest risk to reducing your mileage allowance is that if you travel more miles than you sign up for you are likely to get charged an end-of-contract penalty. This will be detailed in your lease agreement and can vary from 4p per mile all the way up to £1 per mile - potentially with VAT added on, too. The exact figure will depend on the make and model of the car you are leasing and the organisation supplying it.

Some companies stipulate that the penalty will be increased if you significantly surpass the mileage allowance. For example, you could be charged 5p for every mile travelled over a 10,000-mile limit for the first 1,500 miles extra. Above this, the rate may be increased to 10p per mile. Part of the purpose for doing this is to stop people from choosing a mileage allowance massively under what they require, just to reduce the monthly payments and then handing a car back that is worth less than the company expected.

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While you may get charged for excess mileage, you won’t get a refund if you do fewer miles. Therefore, it is well worth putting the time and effort into assessing the right number of miles for you to save unnecessarily paying more to the lease company. Calculating a ballpark figure for your annual mileage needs is quite simple. If your current car was new when you got it, take the number of miles it has driven and divide it by the number of months you have owned it. Once you have this number, multiply it by 12.

The figure you will be left with is the number of miles you have (or would have) averaged over the course of a year. Unless you expect your driving habits to significantly change (such as moving further away from work and commuting by car), this is a good annual mileage to base a lease on. If you would like a little buffer zone in case you travel slightly more, multiply your figure by 1.1 as this will give you 10% extra.

Some drivers do find that having a mileage limit makes them think more about which journeys they really need to do in the car. All those quick trips nipping into town suddenly have more of an incentive to be walked or cycled.

Last but not least for mileage allowances, it can become a point of stress that when a car is approaching its limit a driver might not feel able to drive it as much as they would like. As a result, spending a bit longer accurately gauging your likely mileage is well worth doing.

Extending the length of a lease

Keeping a car for longer can reduce the cost of a lease. This is again because of the future value of a vehicle. Typically speaking, during the first year of its life, a car loses the most significant amount of its value. In the next 12 months, it still loses money but not as quickly, with the same going for year three. This continues year after year until a car reaches a minimum value.

As a result, it can be possible to reduce monthly payments by 15-20% by extending the length of the lease from 24 to 48 months with some cars. For a £400 per month agreement this could reduce the payments down to around £340.

Longer leases also make it easier to plan your finances, which is great if you are trying to save for any big-ticket items, or simply put some money aside. By having your monthly payments locked in for longer, you can say for certain what the cost of your car will be. With shorter agreements, you are more likely to be impacted by any factors driving costs up and down - such as increases in car prices.

Aside from costs, keeping a car for longer saves faffing with changing your vehicle more regularly than necessary, which is ideal for people with busy lives. This is because you won’t need to shop around as frequently for the best deals or swap insurance, breakdown and/or other services. You also don’t need to worry about getting to grips with driving a different car - you can find a car you like and stick with it for a decent chunk of time.

You might be concerned about reliability over a longer-term lease, but many new cars are covered by their manufacturer warranty for more than three years. As a result, if you pick the right car, you can go for a long lease and not have to worry about having an out-of-warranty car.

Renault, Toyota, MG and Kia are four companies which make cars with warranties that run for at least four years. Be sure to check the warranty of the cars you are looking at though, as some might only be covered for three years, which is less appealing on a four-year lease deal.

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There are, of course, some downsides to leasing a car for an extended period of time. One example is that should you take a dislike to the car for whatever reason, you will be tied into it for longer. Similarly, your life may change along with your car needs - an unexpected child or requirement to travel more often might make your current car unsuitable, which could be a problem if you were tied into a long contract.

Car lease agreements are quite strict when it comes to cancelling. It is possible to end the contract early, but there are typically costs associated with doing this, which, depending on the company supplying the car and the value of the lease, can be considerable. As a result, make sure to check the small print about cancelling before signing up for a lease.

As for maintenance, brand new cars are relatively low maintenance but as the years and miles roll by, this changes. On top of many cars needing a service every 12 months, once a car is over three years old, cars need to have an annual MOT, which can lead to unavoidable bills for things such as tyres, brakes and/or wiper blades.

There are also some more costly repairs that can be required as a result of a car having covered a certain number of miles, a set time period passing or excessive wear and tear. As an example, some cars require their cambelt to be changed after 80,000 miles. Given that a cambelt helps make sure all the components inside an engine are not bashing into one another, this is an important - and often costly - job.

Changing a cambelt costs several hundred pounds as a minimum, so if you expect to be travelling oodles of miles and think a longer lease is the best option, it is sensible to research any car you are drawn to. Imagine a scenario where one model needs major work after 80,000 miles and you plan to lease a car with the expectation of travelling 90,000 miles.

Here it would be best to opt for a shorter lease and hand the car back well before the work is needed. Alternatively, you can look for a different car that doesn't need significant work done within the contract period.

Choose a larger initial rental

An initial rental is the first payment due as part of a lease - you don’t get it back at the end of the contract. Normally, the initial rental is a multiple of the monthly payment - so if a car costs £200 per month, you might have the option of paying the equivalent of one, three, six or nine months’ worth as an initial rental.

As a general rule, increasing the initial payment will reduce the cost of the monthly payments. Typically, you can expect that moving from an initial payment equivalent of one month’s lease to six, can reduce the monthly payment by approximately 10%. This is most useful for anyone who has a reasonable amount of cash to pay upfront but who wants to minimise their monthly outgoings. In particular, those applying for a mortgage soon may want to do this as lenders typically look favourably on lower monthly financial commitments.

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Technically speaking, paying more initially may not actually save you money as the lease deal might have the same total cost. As an example, a 12-month lease where the initial payment is £1,000 and a monthly fee of £100 would cost £2,200 in total. A lease over the same period with an initial payment of £400 and a monthly payment of £150 would also work out as £2,200.

So, if you plan on leasing cars one after another you will need to get your next initial payment ready in time to maintain similar monthly payments. There is always the option of choosing a lease with a low initial payment, but that will increase the monthly payments.

Shop around

There are loads of lease companies out there and they know that competition for customers is tough. As such, these organisations often have promotions to attract new business or to increase the number of leases taken out on a specific make and model that they have a lot of in stock. The scale of savings available really does depend on what is being offered at the time you look.

Make sure to keep your wits about you, though, as some deals can be too good to be true. Investigating the terms and conditions should expose any offers which look amazing but are actually worth avoiding. For example, a deal that has extremely low monthly payments and an unsuitably low mileage allowance, but an exceedingly high penalty per mile if you exceed the limit, might be worse value than an offer with a slightly higher monthly payment but a much higher mileage cap.

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Also, when shopping around for different deals, don’t be afraid to consider different makes and models. If you have always driven a Ford Fiesta, it can be worth looking at other superminis, like the Vauxhall Corsa and Renault Clio. A quick look online at the best supermini or SUV or cars for families should bring up plenty of suggestions and can often unearth something left-field that hasn’t been on your radar where they may be particularly good value lease deals available.

Choose a cheaper model/lower spec

One of the fastest, easiest and simplest ways to reduce the cost of a car lease is to choose a cheaper car. You don't necessarily need to downgrade in terms of size or performance, but moving to a brand that is considered a budget option (such as Dacia vs Audi) can bring large savings. Ultimately, some people get a lot of pleasure out of driving a car with a prestigious badge, so moving away from these might be something of a culture shock, though in other cases, going for the affordable choice might be the best option for you.

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Alternatively, you could look for your preferred model but in a less well-equipped specification. If this approach is of interest but you haven’t a clue which trim is which, car manufacturers normally list the different specifications on their websites. The exact saving will depend on the make, model and trims you are looking at but a reduction in monthly payments of around 5% is achievable with some cars.

Depending on which models you're considering, you may need to accept missing out on some desirable features. An example of this could be Apple CarPlay and Android Auto, which can be hard to do without once you have experienced how well they integrate your phone into a car.

Fuel type

Fuel type is a curious topic for reducing the cost of a car lease because it depends on the type of vehicle in question as to which fuel is likely to be least expensive. As an example, a small hybrid car that is perfect for driving in the city will likely be more expensive than a diesel-powered equivalent. While a diesel car that is well-suited to motorway driving will likely be more expensive than a petrol-powered alternative.

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There are a number of reasons why these are the case, but ultimately it comes down to what best suits that driver. In a city, where clean air zones are increasingly common and electric motors make for smooth driving in stop/start traffic, a hybrid or electric model is hard to beat.

While there is some logic to choosing a car with a different fuel type to cut the cost of a car lease, the actual savings tend not to be as large as other areas covered throughout this article. There is also a fair slice of luck as to what deals are available when you are looking, which makes it difficult to provide standardised figures for expected reductions in cost - or even which fuel option is cheapest. Regardless, we would recommend considering the different fuel options and the leasing costs involved.

Avoid add-ons

Add-ons are easy to include in a lease deal, although they can send your monthly payments and/or initial bill skyrocketing. Typically add-ons include an extended warranty, insurance for things such as alloy wheel scuffs and also normal car insurance. None of these are required to be purchased from the company leasing the car itself, but some (such as normal car insurance) are legally required.

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Whether or not an add-on is worth the money depends on your circumstances. You might live and have to park on a road with particularly nasty curbstones that easily destroy alloy wheels. As a result, alloy wheel insurance could be perfect. Just keep in mind that lease organisations might not be the most cost-effective option for these policies, although having all your motoring costs through one company does help keep paperwork to a minimum.

Some companies actually pride themselves on the add-ons they offer. Volvo, for example, offers a car subscription service where you need only add fuel; literally everything else is wrapped up in a monthly fee (including things such as replacement tyres, which is relatively uncommon for maintenance plans).

In stock or due

Last but not least there is the option of looking for cars that are in stock and those that are yet to be manufactured. There can be savings either way, as it depends on what is popular and available at the time.

If you can find a car that is in stock but not many people want to drive - for example, the outgoing generation of a model where a new version is available - you could be onto a winner. Alternatively, finding a car which is not in stock but the manufacturer is keen to sell can make for savings, too.