What is car leasing?

Leasing – also known as Personal Contract Hire (PCH) – is one of the most affordable and hassle-free ways to drive a new car. You pay a deposit, followed by regular monthly payments for a set period, most commonly two or three years. And these payments are generally lower than they would be with other forms of car finance.

The big difference between leasing and other types of finance such as Personal Contract Purchase (PCP) and Hire Purchase (HP) is that you are, in effect, renting the car and you won't own it after you've finished making the payments. Indeed, you have no option but to hand back the car at the end of the contract.

What is the purpose of car leasing?

Car leasing is an easy way of getting into a new car. You simply choose the car you want from a range of online providers and traditional 'bricks and mortar' dealerships, negotiate your initial rental (down payment) and your monthly repayments, wait for the car to be delivered - and that's about it.

You never own the car, so you're not responsible for its depreciation, and you won't have to worry about selling it or trading it in for the best price when the lease deal ends, because you simply hand it back. It's not without its pitfalls, but for those who want a new car regularly, it's a superb option. You could think of it as a long-term rental.

How does car leasing work?

The terms and conditions of any car finance should be made very clear before you sign the contract, and leasing is no different. A car leasing deal will typically have an 'initial rental', followed by a fixed number of monthly payments. You can think of the initial rental as a down-payment, and will be the equivalent of several months' payments.

These deals may also be advertised as 3+23 or 3+35 contracts. This simply means that for these examples, you'll need to make an initial rental deposit equivalent to three times the monthly payment followed by 23 or 35 monthly payments.

You may also me asked to pay an administration fee, but this varies between leasing providers.

There is usually an agreed annual mileage limit which can be negotiated up or down before you sign the contract. You'll pay more for a higher mileage limit, but if you exceed this then you'll have to pay extra money at the end of the contract. Depending on the number of miles the car has travelled over the limit, this could run into hundreds of pounds.

The majority of lease contracts do not include maintenance, although there may be an option to add this to the monthly payments. Unless you specify it, you will be responsible for servicing the car, but it may also be possible to buy a manufacturer's service pack that does the same job.

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Do I need a credit check for a car lease?

Almost every kind of car finance provider will need to run a credit check against you, and leasing is no exception. This is to give them the confidence that you'll be able to make the required payments. You may be able to lease a car if you have a poor credit score, but you may end up paying more.

The car leasing company or car dealership will request a range of personal information which will then be processed to ensure you're eligible. Remember that repeated credit checks can harm your overall score.

Is servicing and maintenance covered on a car lease?

Many advertised leasing deals exclude servicing and maintenance packages by default, but you can add them into your package for an extra fee. Remember that not all costs may be covered, and it'll be your responsibility to ensure the car is serviced in line with the car manufacturer's schedule.

Tax tax (VED) may also be included in your monthly payments, but you should confirm this with the finance company. New cars don't require an MOT test until they're three years old, so you won't have to worry about this on a one, two or three-year lease. But if your lease is four years or longer, you should confirm the arrangement with the leasing company in advance.

What happens at the end of a car lease?

You'll need to make sure the car is in good condition before you hand it back at the end of the contract. If it's damaged, then the finance company will expect you to cover the cost of repairs. It may be cheaper to get damage repaired in advance of the car's return, although sometimes you'll need to seek approval from your leasing company before any work is completed. Reasonable wear and tear is acceptable, and the details will be set out in your agreement. If there's a disagreement over what is 'reasonable', you can refer to guidelines set out by the British Vehicle Rental and Leasing Association (BVRLA), and the organisation offers a dispute resolution service.

At the end of the agreement, the leasing company will usually arrange collection of the car. If you want to take out a new lease, you should do this well in advance of your current agreement ending.

How does car leasing differ from a PCP?

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, because with Personal Contract 'Purchase' you're paying off part of the cost of the car during the course of the contract, and have the option to make a larger final payment to become the owner at the end of it.

Indeed, at the end of a PCP contract, you have three options: pay the final 'balloon payment' so you can keep the car, hand the car back to the finance company, or trade it in for a replacement on a new PCP deal.

When you're leasing a car, you simply hand it back at the end of the contract or arrange another lease. It may 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.

There's a lot to like about leasing, but it's not without its limitations. Here are the main characteristics:

Pros

• One of the most affordable ways to get long-term access to a car
• Deposits are normally cheap
• You can have a better car for a lower equivalent cost
• It's low hassle

Cons

• You don't own the car; you're just renting it
• Contracts don't normally include maintenance
• You have to pay if you exceed your mileage limit
• End-of-contract damage charges

Frequently Asked Questions

How are car leasing payments structured?

Leasing contracts are usually arranged over two or three years and involve an up-front deposit, which is often the same amount as three or six months of payments.

They are frequently advertised as 3+23 or 3+35, which means a deposit equivalent to three monthly payments, followed by either 23 or 35 monthly payments of a specified amount.

Maintenance is not normally included as standard, nor is insurance – you will need to arrange this yourself.

What happens if I miss a car lease 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 – then 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 then 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 then 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, then 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, then you'll probably have to pay off the rest of the contract, which could be several years-worth of monthly payments.

Are there any charges at the end of my car lease deal?

If you stick to the mileage limit, look after the car and return it in good condition then there shouldn't be any excess charges at the end of a lease contract.

However, if you have exceeded the agreed annual mileage limit or if the car has any damage that is considered beyond reasonable wear and tear, then the finance company may charge you. The exact amount will depend on how many extra miles the car has covered (the charge per mile should be detailed in your contract) and the severity of any damage.

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