What is car leasing? Car leasing explained

One of the cheapest ways of driving a brand new vehicle: car leasing explained

Mar 23, 2018

What is car leasing?

A simple and affordable way to drive a new car and change it regularly, car leasing is a form of long-term car rental. After an initial payment, you make a series of fixed monthly instalments and then return the car. 

Leasing often offers the cheapest monthly repayments for new cars but you’ll need to return it in good condition and within an agreed mileage, or you will face charges for damage and excess mileage.

Available as Personal Contract Hire (PCH) for private drivers or Business leasing, which is restricted to sole traders, partnerships or businesses, it’s available for cars and vans, and typically restricted to new vehicles. At every stage, it remains the property of a leasing company.

For more flexibility, Personal Contract Purchase (PCP) finance, also offers low monthly payments for new and used cars. You can either return the vehicle or buy it at the end of the agreement.

Car leasing - the good

✔ Low, fixed payments for the latest cars
✔ You’re not liable for any unexpected drop in car’s value
✔ Easy to regularly upgrade to a new car

Car leasing - the not so good

Mainly limited to new cars
Damage and excess mileage charges apply
There’s no option to own the car



Car leasing - how it works

1 Choose your car and pay an initial rental fee, which is usually the equivalent of three, six or nine months-worth of payments (the larger the initial payment, the less you’ll pay in subsequent monthly payments).

2 Your car is delivered and you’ll make fixed monthly payments for the rest of the agreement

3 Return the car at the end. If you’ve exceeded the agreed mileage, or the car has excessive damage, you’ll be charged more.


Cheapest car leasing deals

There’s some flexibility in lease agreements, so they can be tailored to suit your needs:

  • If you’re looking for the lowest possible monthly price, then you can reduce the mileage limit, as the car will be worth more at the end if it has covered fewer miles.
  • Changing the length of the agreement will also the amount that you pay, but this will depend on the vehicle and how quickly it loses value. In some cases, you’ll pay less each month for a longer, four-year agreement, (although you’ll be paying more overall). In others, the cheapest option is the shortest one - typically two years.
  • Finally, a larger initial payment will also reduce the monthly cost.

As with other types of finance, the cheapest lease deals are available on the least expensive cars that lose value slowly.


Cancelling a car leasing agreement early

It may be possible to return your leased car early and end your agreement by paying a settlement fee but this isn’t guaranteed. In some cases you may even be asked to make all of your remaining monthly payments before you’ll be released from the contract.

This does mean that it's even more important to ensure that payments are affordable before you start. However, leasing firms do know that circumstances sometimes change unavoidably, so it's important to get in touch with them if your payments suddenly become unmanageable.


Car leasing: extra charges

After up to four years of driving, your leasing company won’t expect the car to be returned in the brand new, sparkling condition that it arrived in: stone chips and small scratches are expected.

These are assessed according to industry guidelines set out by the British vehicle rental and leasing association (BVRLA). These state, for example, that small scratches up to 25mm are usually acceptable, providing that they don’t go down to the base layer of the paint. Full details of acceptable defects will be available from your leasing company.

You’ll also be liable for extra charges if you drive beyond your mileage allowance, as higher-mileage cars are generally worth less. It’s common to pay for every mile over the limit.


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