The Ultimate Guide to Car Leasing
Published 26 February 2021
Car Leasing Made Simple
What is Car Leasing?
Car leasing is basically just a lengthier version of car hire or car rental where you borrow the vehicle for an agreed period. The car or van that you lease remains the property of the finance company throughout the period of your lease, and you return it back to them when your lease agreement comes to an end. You don’t have the option to purchase the car.
Car leases are typically between 2 and 4 years. Before you are able to drive the lease car away you have to agree to an annual mileage limit, and pay an initial payment (deposit). The larger the initial payment the lower your monthly payments will be. When you return the lease vehicle it will be inspected and any damage (above normal wear and tear) will need to be paid for. If you have exceeded your agreed annual mileage you will also face additional fees.
Read more: Car Finance Explained
How to Use This In-Depth Guide
Read through each section in this guide or skip to the section you are most interested in:
- How Does Leasing a Car Work?
- Personal Car Leasing (PCH)
- Business Car Leasing (BCH)
- Personal Contract Purchase (PCP)
- The Difference Between PCH and PCP
- Used Car Leasing
- Costs of Car Leasing
- Bad Credit Car Leasing
- Car Leasing with Insurance
- Returning the Lease Car
- Buying vs Leasing – Pros and Cons
- Choosing the Right Car for You
1. How Does Leasing a Car Work?
The amount you have to pay for your lease will vary based on:
- the vehicle make and model you choose,
- how long you want to lease the car, and
- how far you plan to drive each year.
Finance companies have to take account of the fast depreciation of new cars. When you hand the car back at the end of the lease it will be worth far less. Most leasing companies will sell the car when you return it.
Your lease agreement will include:
- The amount you must pay at the start of your lease (initial payment)
- The length of the lease
- Fees for damage that exceed fair wear and tear
- Fees for exceeding mileage.
- Annual mileage
- Termination fees if you want to end the lease agreement early.
At the end of your lease you will have to decide if you want to start a new lease or return the vehicle.
The car remains the property of the finance company throughout.
2. Personal Car Leasing
Personal car leasing is also known as Personal Contract Hire and frequently shortened to PCH.
Car leasing can seem confusing at first because of the different names used to describe it. You borrow or lease a car for an agreed period (usually 2 to 4 years).
Before you drive the lease car you pay an initial payment based on multiples of the fixed monthly payments.
During the lease you pay the same amount each month, and you return the vehicle at the end of the agreement.
The car always remains the property of the finance company, and there is no option to purchase the car at the end of the lease.
Compass Vehicle Services provide personal leasing for people who have bad credit, or who have no credit record.
3 Business Car Leasing
Business car leasing often referred to as business contract hire or just BCH, is a popular long-term car rental suitable for sole traders, partnerships and limited companies.
VAT registered companies can claim back 50% of the VAT for the supply of the vehicle.
Just like PCH you make an initial payment and simple fixed monthly payment for the use of vehicle(s) over an agreed period of time, usually between 2-4 years.
Business car leasing is one of the most affordable ways for a business to finance a vehicle or vehicles, and you simply hand them back at the end of the lease agreement.
- Pros and Cons of Business Vehicle Leasing
- New Business Vehicle Leasing
- Business Leasing vs Company Owned Vehicles
- Branding Your Business Vehicle
4. Personal Contract Purchase (PCP)
Personal contract purchase or PCP is similar to leasing, but you have the option to purchase the car at the end of the agreement.
You make monthly payments over the length of the agreement. The payments cover the depreciation only – the value the vehicle is expected to lose during the term.
If you decide to purchase the car outright, you make a final ‘balloon payment’ made at the end of the agreement.
Interest is payable on the monthly payments and the balloon payment if you decide to buy the car.
If you choose not to purchase the car you can return it to the finance company.
5. The Difference between PCH and PCP
When it comes to choosing a new vehicle there are quite a few important decisions to make, however, the biggest concern is the sort of finance agreement you are going to settle on.
When it comes to making monthly payments for a vehicle, the most popular options are PCP and PCH (car leasing)
As the name suggests, Personal Contract Purchase (PCP) gives you the option to purchase the car at the end of the contract.
Personal Contract Hire (PCH), better known as car leasing, is a long-term hire and you’ll hand the car back at the end of the contract.
The total cost of a PCP contract tends to be higher than PCH in the long term, due to deposits and balloon payments. A balloon payment is a final, larger payment made at the end of a contract, before you take ownership of the car.
Read more: Car Leasing vs PCP
6. Used Car Leasing
Leasing a used car could mean you pay less each month, because a used car tends to depreciate less swiftly than a new one. The amount you pay each month will depend on the particular car you want to lease and your lease terms.
Used car leasing or second-hand car leasing works exactly the same way as normal vehicle leasing. The only difference is that you are not leasing a new vehicle.
There are advantages to used car leasing:
- Vehicles are in stock and ready to lease.
- The monthly payments will be lower because the value of the car is less than a brand new car.
7. Costs of Car Leasing
Car leasing agreements are made up of an initial payment and fixed monthly payments. The amounts will vary based on the length of the lease, the vehicle and model chosen, and the annual mileage. If you require a higher mileage than the standard agreement you will have to pay more.
Your payment profile could typically be 3 x £300 ( £900 initial payment) and 35 x £300 (fixed monthly payments).
In addition to the costs of the lease agreement there are additional costs that it is important to consider:
- Car insurance
- Repairs and Maintenance
- End of lease fees for exceeded mileage and or damage above normal wear and tear.
Read More: Understanding your initial payment and monthly payments
8. Bad Credit Car Leasing
What is Bad Credit Car Leasing?
Bad credit car leasing or non-status car leasing, refers to leasing companies who are willing to loan vehicles to customers who have bad credit.
Mainstream car dealers prefer to lease to customers with a good or excellent credit score, to give them confidence that the customer will make their payments each month and on time.
Common Causes of Bad Credit
Bad credit refers to a person’s history of failing to pay bills on time, and the likelihood that they will fail to make timely payments in the future. It is often reflected in a low credit score. Companies can also have bad credit based on their payment history and current financial situation.
If you make a late payment, miss a payment or pay less than is required by your credit agreement, it all gets added to your credit history.
It will probably come as no surprise that declaring bankruptcy will significantly affect your credit rating.
The same is true if you use an Individual Voluntary Arrangement (IVA), which is a repayment agreement, made between a borrower and a lender when they are unable to pay their debts.
Being the subject of a County Court Judgment (CCJ) by not paying money you owe on time.
Having no credit history -Your credit rating will also be affected if you’ve never taken out a credit card or any kind of loan. In these instances, the credit reference agencies have no information to go on when deciding whether you will pay off any money you borrow in a reliable and timely manner.
Many people have bad credit for a number of reasons. It could be as simple as a missed payment all the way up to being declared bankrupt. No matter what the reason having bad credit can limit your ability to lease a car through mainstream car dealers.
9. Car Leasing With Insurance
Just like buying a car, when leasing you’ll need to obtain fully comprehensive car insurance* to protect not only you and your property but to also protect other people and their property as well.
This insurance needs to commence on the day of delivery and the vehicle must remain insured until the day the vehicle is returned to the finance company.
For personal car leasing, the person whose name is on the vehicle lease agreement needs to also feature as the main insurance policyholder or named driver on the insurance certificate. If the lease is a business lease, the company’s or the director’s name should feature as the insurance policy holder on the insurance certificate.
Importantly, with both personal and business leasing, it is the finance company that owns and remains the registered owner of the vehicle, not you or your company. Your car insurance company should be informed of this when drawing up your policy.
10. Returning Your Lease Car
When your car lease comes to an end you must return the car to your leasing company in good condition.
The British Vehicle Rental and Leasing Association (BVRLA) recommends that you inspect your lease car 10-12 weeks before you hand the keys back to the provider. This will give you time to get any professional repairs done if required.
Customers can arrange to repair any damage that’s outside the agreed returned standard before returning the vehicle, provided the repairs are carried out to a professional standard by a reputable repairer who can provide a fully transferable warranty on the work.
As long as you return the car in good condition, and have met your lease terms there will be northing more to pay.
Fees may be charged if you have exceeded the agreed mileage, if any documents or equipment is missing or damaged, and if you have not maintained the car appropriately.
Customers are not charged at end of lease for any refurbishment that arises from normal wear and tear.
Read more: CVS Ltd End of Lease Options
11. Choosing the Right Lease Car For You
Work Out What Is Essential To You
How many seats do you need? How much boot space do you need? How many miles will you do?
If you’ve got a rough idea of the size and shape of car you’re after, think carefully about what you use it for. If you have small children, a crossover SUV is a good bet, as the raised ride height makes getting kids and their seats into the car much easier. If you’re keen on DIY, carrying capacity may be important – but look out for cars that have easy-to-fold rear seats that lie flat when dropped. Do you need certain features, such as sat-nav, parking sensors and leather seats
Choose the Fuel Type
Having a preference for the fuel type can help you narrow down the right car for you. Most manufacturers offer petrol and diesel engines, but the Mazda 3 for instance is only available in a petrol engine.
Hybrid and electric models are increasingly common and might be a good choice if you do a lot of local driving. However you need to think about how and where you would charge your vehicle.
Diesels are great if you do a lot of mileage as they offer more fuel efficiency and will reduce your running costs.
Choose a Body Type
Keep in mind roughly what size and shape car you want. Do you want the high driving position and load space offered by an SUV, or do you want the small size and manoeuvrability of a small hatchback for city and town driving.
City cars are small hatchbacks and generally the smallest body type. Great for parking and manoeuvrability due to their small size, but minimal boot space.
Superminis such as the Ford Fiesta, and Vauxhall Corsa typically offer 4 seats and a little more luggage room than city cars.
Family hatchbacks such as the Ford Focus, provide yet more space for passengers and luggage.
MPVs come in two sizes; a smaller mini MPV and standard MPV. If you want a higher riding position but like the space offered by a hatchback the mini MPV could be a good choice, such as the Nissan Note. Regular MPVs offer 5-7 seats and extra storage space which is essential for families.
Saloons come in range of sizes from compact executive saloons to to luxury saloons with a longer wheelbase. Saloons tend to offer more legroom than hatchbacks.
Estate cars are usually based on saloons or hatchbacks and tend to be a little longer than the cars on which they’re based. The obvious advantage is the increased boot space over an equivalent saloon.
Coupes were typically a two-door version of a saloon with a lower, hard roof. 4 door models are available with have more practicality with the extra seats.
Crossovers and SUVs. Crossovers tend to be hatchbacks with the chunky styling of an SUV and a raised ride height such as the Nissan Juke and Jeep Renegade. There isn’t a concrete distinction between SUVs and crossovers but, in general, SUVs tend to be bigger and offer more power and cargo capacity.
12. Buying vs Leasing
Buying a car generally involves arranging finance, rather than buying with cash. If you like to own a car outright, and can manage the finance then buying could be a good choice for you.
Leasing is a great way to maximise spending power and will suit anyone who likes to always drive the latest model. Leasing gives you the chance to drive a brand new car without having to pay for it outright.
Advantages of Buying
- You own the vehicle
- You can drive as many miles as you like.
- You can treat your car as you wish
Disadvantages of Buying
- A large lump sum is usually required upfront which can be difficult to find.
- Your vehicle will depreciate significantly in the first few years, so will be worth much less than you paid.
- When you want to change cars you will need to sell it which can be difficult, and you will lose money.
Advantages of Leasing
- It’s the most affordable way to drive a new car
- You can drive a new car every 2 to 4 years
- You can drive a better car than if you were purchasing
- You avoid the problems and expenses of an aging car
- You get a reliable vehicle
- You can budget as you know exactly what you will be paying every month
- There is no depreciation worries
- You don’t have to concern yourself with selling the car
Disadvantages of Leasing
- You don’t own the vehicle
- You need to take good care of your vehicle and make sure it meets fair wear and tear guidelines when you return it.
- You need to stay within annual mileage guidelines to avoid additional fees.
- Early termination can be difficult.
- It can be difficult to lease if your credit rating is poor.
Back to all help and advice articles