What is car leasing?

What is car leasing?
There is no doubt you will have heard the term car leasing before, and you probably have a general idea what it means.

Most cars are available to lease and some, such as the new all-electric Peugeot iOn, are available exclusively as a lease-only car.

But what are the benefits of leasing a car and why do some people choose to lease over owning a car outright?

It is a popular option with business, and is set to become even more relevant as manufacturers begin to release electric and hybrid cars.

This is because the cost of a battery is so high, many manufacturers are leasing out the battery so the cost of replacing it doesn’t fall into the hands – or bank accounts – of the owner.

It isn’t for everyone, but it may be that leasing a car is the best option for you, particularly in the current climate.

What is car leasing?

Car leasing is quite a general term, encompassing a number of different options, such as contract hire, personal contract purchase (PCP), finance leasing, personal contract hire and hire purchase.

In general terms, it means the owner doesn’t ‘own’ the vehicle outright, instead they ‘rent’ it from the company for a set period of time, often with a chance to buy or upgrade the car at the end of a contract.

How does it differ from buying the car?

When you lease, you effectively agree to pay the price of the car minus the expected residual value of a car at the end of a contract.

In basic terms, this means you will pay the cost of the depreciation on the car throughout the leasing contract without ever owning the car itself.

However, the manufacturer will also pay something towards the cost of depreciation meaning you will not be paying the full value of depreciation.

The value is worked out using CAP data to predict the future value of any car.

In purely monetary terms, you can walk away at the end of a contract having paid less than if you had bought the car outright and then sold it at the end of the same period for its new, reduced value.

Why should I lease?

Leasing allows somebody to pay much less for a much more expensive car. This is because the person leasing does not need to worry about the depreciation of the car.

They will only pay for the value of the depreciation – the leasing company is left with the now depreciated car.

It also allows for a very small amount to be paid up front compared to the money required to buy a car outright. This once again means a more expensive car can be leased instead of a much less expensive car being bought outright.

Leasing also allows the person to walk away at the end of the contract, with most deals meaning there is no charge for simply walking away.

It also offers the option of buying the car outright or leasing a newer car, making it perfect for people who enjoy upgrading their car regularly.

Why shouldn’t I lease?

Leasing is not for everyone. The fact that you don’t actually own the car could be a deal-breaker for some, but there are other pitfalls to look out for when leasing.

Many leases come with an agreed yearly mileage set by the manufacturer. This means going over the agreed mileage will result in strict financial penalties.

Some leases require you to find your own insurance, which can often be high and with some deals, you could be charged for taking the car back early or not buying it once the lease is finished.

What types of leasing are there?

There are several ways to lease a car. Here are some of them:

Business contract hire – Business contract hire, as the name suggests, consists of a business car being leased for 24-48 months. The business will pay an agreed fixed monthly payment for the duration of the lease, plus interest.

Personal contract hire – As expected, this means leasing a car for 24-48 months in the same way a business contract hire agreement works. The individual will pay an agreed fixed monthly payment for the duration of the lease, plus interest.

Personal contract purchase – Similar to personal contract hire in that is comprises payments over 24-48 months. The price generally includes servicing and maintenance costs and gives the leasee the option to buy the car at the end of the contract.

Finance leasing – A finance lease involves a finance company effectively purchasing the vehicle. The customer the cost of the vehicle in monthly instalments, plus interest.

This means the customer can buy the vehicle outright at the end of the deal by paying the final instalment, but they will in essence have paid off more than the value of the vehicle because of the interest.

Hire purchase – Hire purchase is a fairly simple form of leasing. It involves the customer paying off the leasing cost over a fixed period of time. However, the monthly payments can be reduced if a larger deposit or longer contract is agreed.

What to look for when leasing a car

As always, we advise anybody looking to lease to shop around. Dealers such as Perrys can advise and offer leasing rates for a huge variety of cars.

Look out for deals which offer things such as road tax, maintenance and servicing with the leasing deal.

Also, keep an eye out for hidden costs, such as the rate you will be charged if you go over the agreed annual mileage. Other charges to look out for are how much it costs to cancel the agreement early and if there is any charge for not buying the car at the end of the deal.