All you need to know about car leasing

So you've decided to buy a new car and a particularly swanky model has caught your eye. But there's just one problem - you don't have the funds to buy it.

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An alternative option might be to lease it. Car leasing allows you to pay for the vehicle on a monthly basis over an agreed period of time. Once that period is up, you then hand back the car and exchange it for a new one if you choose to.

But while leasing has many benefits, it's important to ensure you know exactly what you're getting into if you decide to go down this route, so read on to find out…

What is car leasing?

Leasing is a long-term rental agreement where you pay a monthly fee to use a car for an agreed period and number of miles. A major benefit is that you can upgrade your model every few years – making it an ideal option if you easily get bored with your set of wheels and are always looking for ways to impress the neighbours.

However, this also means you never actually own the car, unless you exercise an option to buy it at the end of the agreement.

If you decide to lease, you can choose from a range of manufacturers and models. You agree with the leasing company how long you'll lease the vehicle for, how many miles you will drive each year and how much you will pay each month – bear in mind that, the more expensive the car, the more you will fork out. You can also opt to have maintenance costs included in your monthly payments.

There are two main types of leasing – personal contract hire and personal contract purchase – so let's look at each in more detail.

Personal Contract Hire

With Personal Contract Hire (PCH), your fixed monthly payments are based on the expected depreciation of the vehicle – the difference between the car's present value and its value at the end of the agreement. This means that if you were to opt for a car that tends to hold its value, your monthly payments would be lower.

The benefits: On the whole, PCH requires a smaller deposit than other finance arrangements and your monthly payments will also be lower than if you were buying the car. This could allow you to choose a more stylish car than you would have done if you were buying.

Your monthly payments might also include a maintenance package and road tax which can help if you're on a tight budget as you won't have to worry about forking out for these separately up front.

Another big bonus is that you don't have to be concerned about your vehicle depreciating in value or selling the car on to someone else as, once your agreement period ends – typically after one to three years – you simply hand the car back. Should you wish to, you can then take out another agreement, enabling you to get behind the driving wheel of another new car.

What to watch out for: Penalties for going over your agreed mileage limit can be expensive. You will also never actually own your car as there is no option to buy it at the end of the agreement. And because you don't own it, you will always have to take out fully comprehensive car insurance.

BEWARE: Hire purchase enables you to break down the cost of your vehicle into manageable monthly payments, making it a good option for those on a budget.

Personal Contract Purchase

Personal Contract Purchase (PCP) gives you the option to buy your car outright at the end of the leasing agreement. You pay a deposit, followed by monthly instalments and then, once the agreement has come to an end, you can pay a final 'balloon payment' based upon the car's value at the end of the lease. Alternatively, you can part-exchange your car for a new model or simply hand it back.

The benefits: Similar to PCH, the initial deposit is fairly small and monthly payments are relatively low.

When you take out the contract, the leasing company will calculate a minimum guaranteed future value (MGFV) and you'll pay this at the end of the contract should you decide to keep the car.

Thanks to this calculation, your car can never be worth less than any outstanding payments, so you can't fall into negative equity. It also means that if you choose to part-exchange the car and the trade-in price is higher than the MGFV, you can use the difference as a deposit.

What to watch out for: Overall, PCP is more expensive than personal contract hire and again, if you go over your mileage limit, the penalties can be costly. Similarly, if you decide to get out of your contract early, you could be charged heavily.
Again, as you don't own the car, you will have to take out fully comprehensive car insurance.

Hire purchase

An alternative way to finance a car is through hire purchase. You pay a deposit and fixed monthly payments, which include interest, for a set period. But unlike PCH and PCP, once you have made your final payment, you become the owner of the vehicle.

The benefits: Hire purchase enables you to break down the cost of your vehicle into manageable monthly payments, making it a good option for those on a budget. Plus, once you've made the last payment, you will own the car and don't have to hand it back.

What to watch out for: If you fall behind with your payments, your car can be repossessed. You are also liable for any damage to the car.

Interest rates on hire purchase agreements can be high, so compare deals carefully. And watch out for an 'option to purchase' fee which can be thrown in at the end of the contract.

Finally, if you'd prefer not to lease your car, there are plenty of alternative ways to fund your car – you can find out more about them in my article.

Please note: Any rates or deals mentioned in this article were available at the time of writing.
 

 

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