What is car leasing?

Do you like the idea of driving a new car, but don’t have the budget to buy one outright or with a finance agreement? Then it may be worth having the car leasing option on your radar.

At face value, car leasing is a very simple and straightforward way of driving a new car. Basically, you’re renting a car over a specified period of time. However, there are some important things to bear in mind if you’re seriously considering a car lease, and this guide will go through everything that you’ll need to know.

What is a car lease?

By leasing a car, you’re essentially renting it for a long period, typically two to four years but some lease providers offer shorter and longer terms. When the lease ends, the car goes back to the provider. You may see the term PCH. This stands for Personal Contract Hire and is simply another name for leasing. At no point in the process do you actually own the car and there isn’t a ‘balloon payment’ that allows you to buy the car outright at the end of the lease, as is the case with PCP deals.

How does leasing a car work?

Just as you would if you were to buy a car on finance, you’ll make a series of regular monthly payments over the course of the agreement when you lease a car. How much you pay will, of course, vary depending on the car and how long you want to lease it for.

When leasing a car, you’ll also need to make something called an ‘initial payment’. In essence, this is an up-front amount of money that you’ll need to put forward at the start of your agreement, and this will generally be the equivalent of the first few months of leasing payments. As a rule of thumb, the more money you’re able to spend on an initial deposit, the lower your monthly payments will be.

When you’re looking at leasing deals, you’ll see them described as ‘3 + 23’, ‘6 + 35’, or something similar. This tells you the size of the initial payment and the number of subsequent monthly payments. So, a 3 + 23 deal is an initial payment equivalent to three monthly payments, followed by 23 monthly payments. A 6 + 35 deal is an initial payment equivalent to six monthly payments, followed by 35 monthly payments.

It’s important that you don’t mistake the initial payment for being the same as a deposit for, say, a rented property. With car leasing, you don’t get the money you put forward as an initial payment when the leasing agreement comes to an end. Instead, the initial payment is used only to pay for a part of the overall lease cost.

At the end of your agreement, you simply hand the car back to the leasing agent. You then have the option to walk away, or put down another deposit and start again with a new car. There are a few things to consider throughout your lease, such as mileage limits.

All lease deals will have a yearly mileage limit, agreed to at the start of the lease, and if you exceed this then you’ll be charged a fee at the end. This will usually be worked out in pence per mile over the agreed limit. If you think you’re going to go over your mileage limit, speak to your lease provider about adding more miles. This may bump up your monthly cost, however it’ll still be cheaper than being charged for excess miles at the end of the contract.  Leasing deals don’t usually include insurance, so you’ll have to source and pay for your own policy. Some providers offer a servicing package at an extra cost which includes basic maintenance such as oil changes. As most lease cars will be close to brand new, you won’t have to worry about the MOT test unless you keep it for more than three years.

What’s the difference between personal and business leasing?

Business and personal leasing are, in essence, pretty similar. The key difference is that with a business contract hire (BCH) deal, you’re leasing the car on behalf of your company rather than an individual. A VAT registered company can lease the car for between one and five years, and it can be used by employees for both personal and business purposes.

A business lease also allows you to claim back up to 100% of the VAT on monthly payments, so long as the vehicle is used solely for business purposes. If the car is used for both business and person use, you can still claim back 50% of the VAT, making it cheaper than a personal lease. Business lease deals also tend to offer higher mileage limits because company cars are usually subjected to lots of motorway miles.

What do I need to lease a car?

There are a few documents you’ll need in order to lease your next car. For starters, you need to have a valid driving license and proof of address. This could be in the form of a council tax or utility bill. Some leasing providers will also want to see proof of income. If this is the case, a few months worth of pay slips will usually suffice.

It’s worth checking your credit score before applying as well. You’re less likely to be accepted for a lease deal with a poor credit rating, so it’s a good idea to know what your score is before applying. If you do have a low credit score, some providers will give the option to nominate a guarantor. This is someone who will be responsible for your payments if you can’t afford them, so they have to sign the agreement as well. Just make sure that, before entering into a lease agreement, that you can afford to make the monthly payments, as failing to do so will not only affect your credit rating but the car will also be taken away from you.

How do I compare leasing deals?

Comparing the latest leasing deals is easy through Carwow. You can search by make and model, by car type or by monthly budget, and you’ll get a list of all the best deals currently available from some top providers. Using Carwow to find your next car lease deal is quick, easy and you’ll save money on your next car. Our network of trusted dealers can even deliver the car straight to your door at a time to suit you.

How does leasing compare to other types of car financing?

Aside from leasing, the main types of car finance are personal contract purchase (PCP), hire purchase (HP) and bank loans.

Personal contract purchase is essentially a loan, only you don’t borrow the full price of the car. You’ll pay an initial deposit, which is usually 10% of the cars value and then you’ll make a series of monthly payments. Like with leasing, you won’t own the car at the end, however you will have the option to buy the car. After you’ve made the final payment, you have the option to hand the car back and walk a way, hand it back and get a new contract on a new car, or you can pay what’s known as the balloon payment and own the car.

Hire purchase is even more straight forward. Like with a PCP deal, you’ll put down an initial deposit and make a series of monthly payments. The difference comes at the end of the agreement. With a HP deal, you pay back the entire value of the car, meaning you own the car outright once the final payment is made. This does mean that the monthly payments will be higher than a leasing or PCP deal, however it’s ideal if you plan to keep the car long-term.

A bank loan is the most flexible finance option, because you’re borrowing the money from the bank to buy the car outright. This means you’re free to do what you want with the vehicle from the beginning, including modifying and selling it. You’ll pay the loan back in monthly instalments plus interest, like any other finance deal. If you do decide to sell the car, you’ll still have to continue paying the loan back.

Is leasing better value than buying?

This can be a tricky question to answer, as there are so many variables and things to consider. With a lease deal, you aren’t paying anything towards ownership of the car, and you have to stick to strict terms. As long as you do stick to these terms, you won’t incur any additional fees, making the monthly payments lower than you’ll get with other types of finance.

Financing is more like taking out a mortgage on a house. You’ll pay a higher initial payment, and it’ll cost you more in the long run, but you’ll own the car at the end, or at least have the option top by paying the final payment, and be able to sell it on.

Is car leasing right for me?

This will depend on your personal situation and what you like to do with your cars. If you want to get a new car every couple of years, and want to keep the monthly payments as low as possible, then leasing could be the ideal choice.

However, if you’d prefer to keep your cars long term, or don’t want restrictions such as mileage limits, you may be better off looking at something like hire purchase.

Car leasing FAQs

Do I make monthly payments on a car lease?

Yes you do. As mentioned above, you may see leasing terms such as 3+23. This means your initial deposit will be three months worth of monthly payments, followed by 23 monthly payments.

Do I own the car at the end of the lease?

No. Throughout the lease, the car remains the property of the provider. However, as the car’s primary user your name will appear on the registration document (V5C). When the lease ends, the car is returned to the provider.

What cars are available to lease?

A wide variety of cars are available to lease, from an equally broad selection of car companies. Therefore, you should be able to find a lease deal for the ideal car for you – though the selection of cars may be limited, depending on the provider.

While this isn’t always the case, leased cars have often already been specified by the provider, so you may not be able to have the car in your ideal specification. Many providers tend to specify their cars with decent amounts of equipment and creature comforts, though, so they should still have some appeal even if they don’t have your preferred colour.

Will my leased car be delivered to my door?

Yes. In fact, so long as you’re there to sign for it, you can have the car delivered pretty much anywhere. Different lease providers will quote different delivery times but, in most cases, you shouldn’t have to wait more than two to three weeks.

Will road tax be included in my lease?

Whether or not the car will be taxed depends on the lease provider. The cost may be factored into your payments, or it may be your responsibility. It should be clear in the terms of the lease agreement what the situation is but if it isn’t, ask the provider.

Will car servicing be included in my lease?

Many lease providers offer maintenance packages for an extra fee on top of the monthly payments. If you choose to have one, you simply inform the provider that the car needs servicing and they’ll arrange for it to be serviced at a convenient time. It may even be collected and delivered back, so you never have to go to the dealer yourself!

If you don’t pay for a maintenance package, you’ll have to arrange and pay for servicing yourself. The provider will insist that you use a manufacturer-approved garage.

Will my leased car need an MOT?

Cars don’t need an MOT until they’re three years old. So, if your lease is less than three years, the car won’t need one. But if the lease is more than three years, it will. In that case, check with the provider to find out if you’re responsible for arranging and paying for the MOT.

If your lease is for three years exactly, check the car’s registration date on the V5C. It’s likely that the car was registered a short time before it was delivered to you and will, therefore, need an MOT before it goes back to the provider, even if there’s only a couple of days in it.

Will car insurance be included in my car lease?

You should expect to arrange your own insurance cover. Make sure you inform your insurer that the car is leased and which provider it’s leased from.

Is my leased car covered by the manufacturer’s warranty?

Yes. If the car develops any faults, contact the lease provider and they should arrange for the car to be looked at by a manufacturer-approved garage. If the fault’s covered by the warranty, the car will be repaired and returned to you. Faults that the manufacturer refuses to fix under warranty will be the result of neglect or misuse. In those cases, it’ll likely fall to you, as the car’s user, to pay for repairs.

Consumables such as tyres and brakes aren’t covered by a warranty, so you’ll have to pay for any replacements.

What happens if I crash my leased car?

Always inform the lease provider if the car suffers damage of any sort and claim for the damage through your insurer as normal. It could be that the provider wants to coordinate with your insurer to make sure the car is repaired to an acceptable standard, but you shouldn’t be involved in the process. It may cause delays, though.

If no third party is deemed to be at fault for the damage, it’s likely you’ll have to pay a penalty charge to the provider. This, in effect, covers the reduction in the car’s used value that has been subject to an insurance claim causes.

What happens when my car lease ends?

The lease provider will arrange for the car to be collected on the day the lease expires at a convenient time. Make sure all the documentation is in the car. It’s helpful if you clean it as well.

The person collecting the car will inspect it for damage and faults, check the documents and make sure you haven’t exceeded the mileage limit. If there are any issues, you could be charged a penalty fee. If you wish to dispute the penalty, inform the person collecting the car and/or the provider. If you’re disputing that the car is damaged or faulty, take pictures of the areas in question to back up your case.

Otherwise, there’ll be some paperwork to do, you hand the keys over and your responsibility for the car ends.

Can I buy my car at the end of its lease?

Lease providers don’t routinely offer the opportunity to buy the car – there’s no equivalent of the ‘balloon payment’ on a PCP deal. In fact, the provider itself has probably leased the car from a manufacturer or dealer and it’ll ultimately be returned to them.

But there’s no harm in asking if you do want to buy the car. The provider may be able to sort it out for you.

Can I return my lease car early?

If you can no longer afford your lease, the provider should allow you to terminate it early. Or, if there’s been a change in circumstances that mean you need a different car, the provider should be able to sort it out for you. In either case, there’ll be extra fees to pay.

What if I’m not happy with my lease?

If you have any issues with your leased car, lease agreement, or the provider, you should contact the provider first. If they can’t or won’t resolve the situation contact the British Vehicle Rental & Leasing Association (BVRLA), which offers a dispute resolution service.

If a matter involving the lease agreement can’t be resolved by the provider or the BVRLA, contact the Financial Ombudsman.

What is the BVLRA?

The British Vehicle Rental and Leasing Association represents car lease providers operating in the UK. The BVLRA enforces a strict code of practice, so make sure any provider you’re thinking of using is a member. There’s a directory of members on the BVLRA website.