Everything you need to know about car leasing

Leasing is one of the cheapest ways to get a new car on to your driveway. Often called Personal Contract Hire (PCH), or just Contract Hire, car leasing deals are similar to Personal Contract Purchase (PCP) deals but, as the name suggests, with leasing you’re effectively hiring the car for the duration of your contract, while with a PCP deal you have the option to own the car eventually.

Although you can’t buy your car at the end of a leasing contract, the monthly cost is typically very cheap compared with taking out a bank loan to pay for a new car. You’ll typically pay an initial payment, followed by monthly payments covering the term of your agreement. This is why it’s the ideal choice for someone who wants to drive a new car every few years, and who isn’t bothered about actually owning the vehicle at the end of the contract.

It's also a great choice for businesses. Business contract hire allows a company to keep its fleet up to date, use cars with all the latest efficiency technology and claim back at least some of the VAT on the rental.

How is a leasing deal structured?

The typical contract hire deal is advertised as, for example, '3 + 35'.

What this means is that at the start of the lease you’ll pay an initial payment that's three times the amount of the normal monthly payment. The second figure refers to the length of the contract in months after the initial payment.

There are numerous contracts available to suit every budget, and '3+48' and '6+24' are also common contract terms.

What are the pitfalls of car leasing?

Anyone considering a personal lease rather than a PCP deal on their next car should bear in mind that there are pitfalls, the biggest of which is likely to be the prospect of an early termination fee. 

With a lease over a set period, you will normally be required to pay a minimum of half of the remaining monthly payments if you want to end the lease early. Some companies stipulate that you have to pay all the outstanding payments, which could amount to thousands of pounds. 

Therefore, it’s important to carefully consider how long you want a lease to last and ensure you will be able to meet all the payments. 

What is wear and tear?

'Wear and tear' are three words you’ll become familiar with at the end of your contract. Why? Well, because you need to make sure the car is in good condition before you hand it back. If it’s damaged beyond what your contract with the finance company lists as 'fair wear and tear', you’ll be expected to cover the cost of repairs.

Most companies will have a fair wear and tear guide, either on their website or included with the contract. It's a good idea to look at your car a good three months before the contract is due to end and have repairs carried out on any dents or scratches on the bodywork, nicks or tears in the upholstery, and scratches on the wheels.

Obviously, the best way to avoid having to carry out these repairs is to look after the car fastidiously in the first place, but sometimes things happen. The important thing is to stay in touch with the finance company and make sure you know exactly what you're liable for.

There have been reports of leasing companies landing customers with unnecessary and excessive repair bills when cars are returned. To minimise the chance of this happening, check over the car carefully and take photographs of it from every angle when you take delivery of it and when you hand it back. Point out any paintwork blemishes before driving the car.

What is a mileage limit?

All leasing contracts are based on a fixed mileage, and if you exceed the agreed figure, you will face an extra charge for every extra mile travelled. This can be quite costly, so it's a good idea to calculate as accurately as possible the mileage you will drive, and ask for a quote based on this. 

Mileage on a leasing contract is usually advertised as ‘per year’. For example, 8000 miles or 8k per annum, which adds up to a total contract mileage of 24,000 or 24k over a three-year lease. 

The company you lease the vehicle from should always advise you of the excess-mileage charge up front and it should also be shown on your contract. The excess-mileage charge varies depending on the vehicle, so make sure you know what it is.

One thing to remember is that although any contract is quoted with a yearly mileage, any unused miles carry on to the remainder of the contract.

Do I have to worry about maintenance?

The vehicle remains the property of the leasing company throughout the length of the lease term because you are, in effect, merely hiring it. But you’re responsible for covering any maintenance costs, such as servicing, which come up during the course of your contract, as well as any repair costs.

Most car leasing agreements do not include maintenance as standard. However, many companies offer an optional maintenance package that will include it for an extra monthly fee. These can offer peace of mind and make budgeting easier.

Maintenance packages can sometimes be tailored to what you need, so can include servicing, repairs, new tyres and batteries, exhausts, breakdown recovery and MoT testing. However, it pays to work out what you think you’re likely to need.

Bear in mind that all new cars are covered by a manufacturer's warranty for the first three years do not need an MoT test until they are three years old. Keep in mind, too, that servicing costs and wear and tear items, such as tyres, are not covered by the car’s warranty.

Does a leasing contract include car insurance?

No. Car insurance is not included in a leasing contract, so it’s up to you to arrange appropriate cover. Leasing companies demand that the car is insured under a fully comprehensive policy.

Comprehensive insurance is the most complete, all-encompassing cover for you and your vehicle, because your car will be repaired even if any accident is your fault. Third-party insurance only pays for the repair of the other party’s vehicle, not your own.

How does car leasing differ from a PCP deal?

On the face of it, leasing and PCP deals are similar, because both involve a deposit and regular monthly payments.

However, the clue is in the name – with a Personal Contract ‘Purchase’, you’re paying off part of the cost of the car during the course of the contract, and have the option of making a larger final payment to become the owner at the end of it.

At the end of a PCP contract, you have three options: hand the car back to the finance company, trade it in for a replacement on a new PCP deal or keep it. If you decide to keep it, you normally have to make a ‘balloon payment’ to cover the car’s minimum guaranteed future value (MGFV), which is set at the start of the contract and is the amount the finance company thinks the car will be worth at that time.

When you’re leasing a car, you simply hand it back at the end of the contract or arrange another lease. It might also be possible to extend the contract and hang on to the existing car for longer, but you’ll have to arrange that with the finance company.

What happens if I miss a car leasing payment?

Late payments with any form of finance can affect your credit score and make it harder to arrange finance in future.

If you’ve missed a payment – either by accident or because you can’t afford it – the finance company may charge you an additional fee. The exact penalties for late payments should be outlined in your contract. Some lenders will be more flexible than others, but if you keep missing your payments, the finance company has the right to repossess the car.

The best thing to do if you have missed a payment is to immediately contact the finance company. If it genuinely happened by accident and you make the payment as soon as possible, you shouldn’t have too much trouble – although some lenders may still charge a late fee.

If you’re struggling to afford your monthly payments, it’s still better to talk to the finance company than to fall behind. The company might be able to extend the contract to lower the monthly costs or attempt to find another solution.

Some forms of car finance allow you to hand back the vehicle to the lender once you’ve paid off half the cost. That isn’t the case with leasing: if you return the car, you’ll probably have to pay off the rest of the contract, which could be several years worth of monthly payments.

How can I get the best car leasing deal?

The best way to get a great deal when leasing a car is to check out What Car?’s personal lease special offers.

We keep track of the top personal contract hire offers from franchised dealerships around the UK to bring you the most competitive deals in the market. You can search by business or personal lease contracts, annual mileage, payments and length of contracts, or by the specific type of car you want.

Background – car ownership is declining

Car ownership is on the wane, and the rise of PCP deals is the catalyst. PCPs started to account for more new car finance deals than HP in 2008, and they’re now used to buy more than 80% of new cars. 

With a PCP deal, you’re paying off part of the cost of the car during the course of the contract, and have the option of making a larger final payment to become the owner at the end of it. PCPs became popular with consumers because they offered cheaper monthly payments than traditional Hire Purchase agreements.

However, leasing deals typically offer even lower monthly payments, which are calculated based on the vehicle’s expected depreciation (the difference between the purchase price and the resale value at the end of the agreement), taking into account age and mileage. The better a car holds its value, the lower your payments will be, which can allow you to run a more prestigious car than you could afford to buy.

This is why there has been a huge surge of interest in leasing. People are keen to get more for less, and are prepared to overlook the fact that leasing deals don’t offer the same level of flexibility (you can’t buy the car at the end of the lease, and you don’t get any funds to put towards a new vehicle).

In addition, leasing lets you drive a new car every two or three years without worrying about it depreciating, running out of warranty or how you’ll sell it on.

A lease deal usually requires a smaller deposit and lower monthly bills than you’d pay if buying the car, payments are fixed and can include a maintenance package, and road tax (VED) is usually included. 

There’s no option to buy, so at the end of the contract you just hand back the car. No hassle.

Conclusion

Leasing can be a great way to get yourself into a much better car than you might otherwise have been unable to afford, but it isn’t for everyone.

Before entering into a contract, you’ll need to be confident that your income will be steady enough that you’ll be able to keep making the payments for the length of the lease, and that you’ll be able to stick within the mileage limit. And, of course, you need to understand that at the end of the lease you’ll need to hand back your pride and joy.

However, if you want to get a new car regularly and can sort out the ideal deal for your motoring and financial needs, leasing can be a hassle-free way to run a car.

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