What is car leasing? Car leasing explained

If you want a simple, low-cost way to get behind the wheel of a brand-new car, a lease deal could be a good way to go.

It provides one of the lowest rates of monthly payment (though in certain circumstances PCP finance options can prove cheaper) and is an uncomplicated way to pay for the use of a brand-new car. If you're looking for a used car, there are some used car leasing options available to you, alongside great value finance deals.

As a basic concept, Leasing - known as Personal Contract Hire or PCH - is really nothing more complicated than the long-term rental of a car. All you do is pay an initial fee (usually equivalent to a set number of monthly payments) and then a series of fixed payments over an agreed period of time - there’s nothing more to it.

At the end of the term of your lease, you hand the car back, and there is no option to buy it. Part of a lease agreement will include a mileage limit. Generally speaking, the higher the mileage you expect to do, the more expensive the lease, as higher-mile cars are worth less to the leasing company when they get them back. If you do go over this, you'll be charged a fee for every extra mile you cover. This is usually around 5-10p per mile, though with rare cars or some sports cars this could be as much as 30p or more. You’ll also need to return the car with nothing more than fair wear and tear or face extra charges.

While private individuals can take out PCH (Personal Contract Hire) leasing agreements, for businesses, sole traders and partnerships there are commercial leasing products available (which feature prices without VAT). Leasing is available for cars, vans, and even taxis, but is typically restricted to new vehicles. The vehicle always remains the property of the leasing company.

If you are considering purchasing the vehicle at the end of the agreement, but haven’t decided yet, it may be worth considering a PCP (Personal Contract Purchase) agreement. At the end of a PCP agreement, you have the option of buying the vehicle, although monthly payments are typically a little higher, like-for-like, than with a lease.

Find out whether PCH leasing is for you by watching our video guide below:

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 of 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. The car will be worth more at the end if it has covered fewer miles, so leasing firms will charge you less.
• Changing the length of the agreement will also affect 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.
• Agreeing to make 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 and the ones that lose their 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 you go over the limit.

Ending a lease early

Whatever your position when you sign up for a leasing or finance agreement, your situation can change unexpectedly. You might need a different vehicle, to cut your repayments, or even to get rid of a car entirely.

If you own your car, or have a finance agreement, then it’s often possibly to return or trade it in for a reasonable cost. 

Car leasing is a bit different, however. It's also known as personal contract hire and is effectively long-term car rental. There is no automatic right to end one of these agreements early, so it can be expensive. You can see some of the options below

Personal Contract Purchase (PCP) is a type of finance that operates like leasing - with low monthly payments and the option to return the car at the end. We've outlined some ways to end PCP early further below.

Ending a lease with Voluntary Termination

The right to Voluntary Termination once you have repaid at least half of a finance agreement does not apply to leasing because it's not classed as car finance (there's no borrowing involved).

As a result, you have no automatic right to return the car early.

Ending a lease-type agreement early

There are more options if you have a lease-type of finance - Personal Contract Purchase (PCP) is the most common.

The monthly repayments only cover part of the car's cost: the value that it's expected to lose during the agreement, so payments can be similar to a lease. At the end, you can return the vehicle or there’s an option to buy, which is known as the balloon payment.

The cost of ending a PCP agreement early ultimately depends on the value of your car, compared with the amount left to pay (including the final balloon payment).

So if you still owe £7,000 and the car’s worth £6,500, you could cancel the agreement by  trading the car in and then paying up the £500 difference, or using negative equity finance to do so. If the car's worth more than the outstanding amount, then you should be left with a surplus that could be used towards another car.

Bear in mind that you will still be liable for excess mileage and damage payments if you end your PCP agreement early: your mileage limit will be adjusted to take into account the reduced length.

Voluntary Termination is also an option with PCP finance; you can return the car once you've paid off half of the total debt, including the balloon payment. However, the size of the balloon payment means that this usually happens towards the end of a finance term. You'll need to top your repayments up to half of the debt if you want to terminate the agreement earlier.

Ending a lease agreement early

Car leasing requires an initial payment. You're then charged monthly instalments to rent a car for a set term and then return the vehicle.

The terms are all set out in a fixed-term agreement, which usually lasts between two and four years. As a result, there’s often no cheap way to end it early. If you want to hand your car back early, then you may be asked to pay all of the remaining instalments due to settle the agreement. If that happens, you might decide that it’s better to keep the vehicle and make your payments as normal.

You may get a more favourable option if you ask the leasing company to switch your lease to another vehicle - a larger, or more economical car, for example. However, there’s no guarantee that the request will be accepted.

In both cases, there's no harm in checking to see if a favourable option is available, but it’s best to assume that you’ll have to pay the full amount that you owe.

In a few cases, negative equity finance may help. This allows you to take out finance for a new car and add on the costs from a previous agreement, paying both in a single instalment each month. This can be a good option if you badly need a different car, but is unlikely to be cost-effective when it comes to ending a lease early.

If you are struggling to make payments, then you should contact the leasing company immediately, as they may be able to help.

Car leasing with no deposit

If you're looking for the lowest monthly payments on a brand new car, then leasing could be the answer. Car leasing essentially works like a long-term rental agreement and generally features lower monthly payments than other finance options. You make a payment upfront, followed by a series of monthly payments. At the end of the contract, you hand the car back and walk away.

Lease contracts often require you to make an initial payment before the car is delivered. This is typically presented as a number of monthly payments - some deals require the equivalent of nine monthly payments upfront, while others may only require the equivalent of one - so you may not need to find a large amount to pay upfront. Generally, the more you pay upfront, though, the less you'll pay each month.

There is another way to get a car with an affordable monthly payment and no deposit, however. Personal Contract Purchase (PCP) finance offers similarly low monthly payments, while giving you the option to buy the car at the end of the contract. It's also available on used cars - something that isn't normally the case with leasing - which means you should be able to get even lower monthly payments with PCP.

We don't offer leasing with no deposit here at BuyaCar but we do have are a number of lease deals with only one or two months' worth of upfront payment needed that could fit the bill. Alternatively, you can take advantage of a no-deposit PCP finance deal that provides you with low monthly payments and some added flexibility at the end of the contract.

Unlike leasing, you can also use PCP finance for used car purchases, so it may be worth checking out if you fancy the lowest possible monthly payments on your next car. Click on the button below to see just how much you can get for your monthly budget with BuyaCar. When you find a car you like, click on the car and head to the finance calculator on the car page, where you can set a contract length, deposit amount and mileage allowance to see how much your monthly payments could be.

No deposit lease-type finance - PCP finance

As is the case with leasing, monthly payments on a PCP finance contract are low because they only cover part of the car's cost - in this case the value that the car is expected to lose over the course of the contract, also known as depreciation. In other words, your deposit - should you pay one - and your monthly payments don't cover the whole value of the car.

At the end of a PCP contract, you can return the car with nothing more to pay, provided that you've stuck to the pre-agreed mileage allowance and kept the car in good condition - just like leasing. However, with PCP there's also the option to make the optional final payment to buy the car outright. Despite this, many drivers choose to hand the car back and get another vehicle.

Unlike leasing, PCP finance is available on new and used cars and, depending on your credit rating, you may be eligible for no-deposit finance. With PCP finance it can also be easier to hand the car back part-way through your contract than with a lease, either by settling the remaining finance balance - paying the difference between the outstanding finance balance and the current value of the car - or by using a right called 'Voluntary Termination'.

To use Voluntary Termination you will need to have paid at least half of the total amount payable - that's the deposit, monthly payments and optional final payment, combined - which normally only happens towards the very end of the contract. It still offers an additional layer of protection if your circumstances change and you are no longer able to afford the car or it's no longer suitable for you.

Car leasing with no deposit - what’s the catch?

With no deposit to pay, you’ll have at least a month to save before your monthly payments begin, and there’s no need to raid any of your savings to pay the initial deposit. However, if you put no deposit down your monthly payments will be higher than if you had paid something upfront.

With PCH leasing, that means you're tied into a contract with higher monthly payments than if you paid a deposit, and if your circumstances change it can be difficult and costly to end the contract early. Meanwhile, if you opt for PCP finance, putting down no deposit means you'll also pay more in interest because you're borrowing the full value of the car - the larger your deposit, the less interest you'll pay.

In the case of PCP, you’ll also be in negative equity for longer (where the outstanding debt is greater than the current value of the car), which could be an issue if you need to end the contract relatively early on. Negative equity happens when you owe more than the car is worth - which is typically the case until you reach the end of a PCP finance contract.

In some cases, you may be in negative equity until the end of the contract. It’s only a problem if you want to return the car early - as you’ll need to pay the difference between the remaining finance balance and the car's current value - or if the vehicle is written off, as the insurance pay-out may only cover the car's current value before it was written off, which could be less than the remaining finance balance. In that situation, Gap insurance can cover this risk.

Fear not, however, if the car is still in negative equity at the end of the contract and you want to hand it back. Provided you've kept the car in good condition and have stayed below the pre-agreed mileage limit, there should be nothing extra to pay - you can simply hand the keys back and the finance company takes the hit - not you.

Meanwhile, if you know you're in negative equity and are still quite early on in the contract but need to change car, you do still have a number of options. Check out our guide to negative equity car finance to see which works best for you.

*Representative PCP finance - Ford Fiesta:

48 monthly payments of £192
Deposit: £0
Mileage limit: 8,000 per year
Optional final payment to buy car: £2,923
Total amount payable to buy car: £11,926
Total cost of credit: £2,426
Amount borrowed: £9,500
APR: 9.9%

BuyaCar is a credit broker, not a lender. Our rates start from 6.9% APR. The rate you are offered will depend on your individual circumstances.