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How Does Car Leasing Work? A Beginner's Guide

9 Sep 2020

Understanding how car leasing works can be rather confusing if you’ve never leased a car before. You will probably have so many questions and the information out there on the internet just throws all of these buzz words at you, expecting you to just know what they mean. We understand how annoying and frustrating that can be, which is precisely why we have put together this beginner’s guide to car leasing.

 
By reading this, you’ll be able to get your head around the basics of how car leasing works, so that you can at least feel more comfortable when looking through the various car lease deals available.
 
If, after reading this, you feel ready to learn more about each aspect of car leasing, we also have a selection of in-depth car leasing guides to help you get your head around it all even more!

What Is Car Leasing?

When you want to learn about how car leasing works, the first step is to understand what car leasing actually is. After all, as we said earlier, a lot of the information out there assumes that you have a basic understanding of car leases. So, if you don’t really understand how car leasing works or what it actually is, it can be very confusing.
 
Car leasing is basically a long-term rental of a car. If you think about how, when you go on holiday, you can rent a car for a week or two, car leasing is similar. However, the rental period is usually between two to five years. The payments are also smaller than a holiday rental.
 
You get to drive the car for the length of your lease, as long as you keep up the payments, but don’t have to worry about things like the value of the car decreasing. That’s because, at the end of the lease, you give the car back.
 
Similar to a house rental, you have to pay an initial deposit for the lease. Then, at the end of the lease, if there are any damages, you’ll need to cover the cost of fixing those.
 
That’s basically what car leasing is – it’s not too complicated, as long as someone takes the time to explain it to you. So now that we’ve got that covers, let’s look at how car leasing works in more detail.

What’s The Difference Between Personal & Business Car Leasing?

To begin with, there are two main types of car leasing; Personal and Business Car Leasing. Personal Car Leasing is quite simply when you get a car lease deal for yourself, where you cover the costs and the lease deal is tied to you specifically.
 
On the other hand, Business Car Leasing refers to car leases that are done through a company for its employees. The business takes on the lease and the cars are driven by those who work for the company.

Personal Car Leasing

When it comes to Personal Car Leasing, it is commonly referred to as PCH (Personal Contract Hire). As the individual who will be taking on the lease, you will need to personally cover the deposit cost and will be responsible for the car whilst you are leasing it.

What Is PCH And How Does It Work?

Personal Contract Hire is the financial name for personal car leasing. The name explains exactly what you will be getting when you take up a car lease, in that it is a contract to hire a car for personal use.
 
As mentioned previously, you will need to put down an initial deposit that is typically the equivalent of three to six months of payments. Then, you will have to look after the car as you use it for the period of the contract. At the end of that contract, you’ll return the car to the finance company, at which point, you can choose to get a new lease deal. But we will cover what happens at the end of the lease period later.

What Is The Difference Between PCP and PCH?

Whilst we have already covered what Personal Contract Hire is, another acronym that you’ll likely see when looking at car leasing is PCP. This stands for Personal Contract Purchase, and it has specific fundamental differences to PCH.
 
With Personal Contract Hire, you pay each month and then give the car back, not having to worry about the value of the car degrading. However, when it comes to Personal Contract Purchase, you actually end up owning the car at the end. This is done through a lump sum payment at the very last month, which is usually a large amount of money that you need to prepare for.
 
From there, the car is then yours, but it is important to note that the value of the car will be considerably less than when you first got into it. Therefore, it can actually be better to use Personal Contract Hire and return the car, getting another new car for the next few years.

What Restrictions Are There On Personal Car Leasing?

If you are looking at getting a car on a personal lease, you need to be aware of the various restrictions that you could come across. After all, a personal car lease is a significant financial agreement over the course of a number of years. So, the finance provider needs to make sure that you are going to take care of the car and that it will be returned in the same condition as when you got it.

 

So, what restrictions are there for personal car leasing?

  • The first one that you need to be aware of is that you cannot modify a car that you lease in any way. We’re not just talking about spoilers and body kits either. For example, you cannot add a tow-bar without getting specific permission first. That said, you can request such modifications before you get the car.

  • There will be restrictions on the annual mileage for each lease deal. If you go over that mileage, you will have to pay for those additional miles. This can typically come in at 10p for each extra mile, so you’ll want to make sure your agreed mileage is enough to cover your travel.

  • The car will need to be returned in what is called “good repair and condition”. This basically means that only fair wear and tear through standard use will be accepted. If there is any damage to the car, you will likely be charged to cover the repairs.

  • If you want to go abroad and take your leased car with you, then you will need to get written permission from the finance company for each trip. On top of this, there may be a charge that you would need to pay.

Business Car Leasing

When it comes to Business Car Leasing, it is very similar to Personal Car Leasing, with the exception that it is done through a company so that it can provide cars to its employees. It is also worth noting that the costs of the car lease deals can be claimed as expenses for tax as well.

What Is BCH And How Does It Work?

BCH refers to Business Contract Hire, and it works almost exactly the same as Personal Contract Hire. Effectively, you pay a monthly fee for each car that you get on a BCH deal, and then you return them at the end. The same restrictions that are placed on a Personal Contract Hire vehicle are typically applied to BCH deals as well.

What Happens At The End Of The Car Lease?

Okay, so we have gone through the various aspects of both Personal Car Leasing and Business Car Leasing, but what happens when the lease ends? That is something that is really important to understand before you go ahead and sign on the dotted line.
 
For starters, as we have already covered, you will have to give the car back. It needs to be in good condition, without any damage and not in need of significant repairs. If there are any damages to the car, you will almost certainly have to pay a penalty to cover the cost of repairing them.
 
Once you have given the car back, you can then look to get a new deal and a new car, starting the process again and ensuring that you continue to have a quality car to drive.


Is Car Leasing Right For You?

With all of the information that we have covered so far, the next step is to determine whether car leasing is the right way for you to get a new car. The best way to do this is to look at the pros of car leasing and the things that you need to consider before getting a lease deal.

The Pros of Car Leasing

Starting with the pros of leasing a car, the biggest benefit is the affordability of the vehicles. Whilst there is a deposit to pay at the start because you will be giving the car back at the end, the monthly payments are much lower than you would typically expect. This is especially true when you compare it to other finance options where you end up buying the car.
 
Another positive aspect is that you get to experience and drive a brand new car every few years. If you think of it as a phone contract, at the end of each contract period, you get to upgrade to the latest version of a car or a brand new vehicle entirely.
 
The final major pro for car leasing that you need to consider is the fact that some car leasing deals will actually include maintenance fees such as services and tyres. This means that you can actually end up saving money because the care of the vehicle is already covered.

The Considerations About Car Leasing

With the positives covered, it is time to look at the things you need to take into consideration before you agree on a lease deal. After all, you want to make sure you know what you are getting into.
 
First thing’s first, once again, you won’t own the car. At no point in the lease deal, nor after the contract has ended, can you actually take ownership of the vehicle. Whilst this may seem like a negative at first, the fact that you don’t have to worry about selling it in the future to get a new car is actually a really good thing. The value of a car will constantly decrease, so if you need to sell it, you’ll never get the same money back that you paid. Giving the car back at the end of the lease means that you don’t have to worry about any of that.
 
That said, we cannot stress enough the importance of choosing a car lease deal that gives you enough mileage. Going back to the phone contract analogy, we all know the horror stories of people running up huge bills on their mobile phones by going over their limit on calls or data. This is similar when it comes to a car lease deal.
 
If you go over the mileage limit, you typically have to pay around 10p per additional mile. It’s easy to see how quickly that can add up to be a very large amount of money. So you need to make sure that you deal gives you enough miles each year, so you can afford any large extra bills to pay. 

How Does Car Leasing Work With Payments?

Moving on, we need to look at how car leasing works with payments. After all, being that it is a financial agreement, there are a number of different payment aspects to consider.

The Initial Deposit

The first payment you’ll need to cover is the initial deposit. This is typically around the same amount as 3 or 6 month’s worth of the monthly payments, similar to the deposit when renting a house. You will need to save this money up and have it ready at the very start of the contract.

Making Monthly Payments

Once the contract for your car leasing deal has started, you will have a series of monthly payments to make for the duration of the lease. It is important that you ensure the payments are affordable and within your budget, as missing them can have an effect on your credit score.

What Costs Do You Have To Pay At The End Of The Car Lease?

Unlikely Personal Contract Purchase deals, a car lease does not have a lump sum amount for you to pay when the contract runs out. That said, you may still end up having to pay extra when you give the car back if it has any damages or needs any repairs. This is because, as per the restrictions put in place by most car lease contracts, you need to return the car with only “fair wear and tear”. Anything beyond that will need to be covered by an additional fee.

Does A Car Lease Affect My Credit Score?

When you apply for a car lease deal, the finance provider will carry out a credit score search. After all, they need to make sure that you are actually going to be able to afford the monthly payments and will keep up with them. Following that, the biggest risk that your credit score will face comes into play if you miss the monthly payments. So, again, it is important to make sure that the deal you go for is within your monthly budget.

Can You Extend A Car Lease?

Another question that you might be wondering is what to do if you really like the car you have and don’t want to give it back immediately at the end of the contract. One thing to know about how car leasing works is that you can request an extension of the deal. This is usually only for a few months, but because the value of the car will have already decreased, there is the potential that the monthly payments will be lower too.

Can You End A Car Lease Early?

The final aspect of car lease payments to consider is what happens if you want to end the lease deal early. As with other similar services like phones, you will need to pay an early cancellation fee to do so. That is likely to be a large sum of money that you need to pay in one go, so it is worth keeping that in mind. If you want to end the lease early, make sure you find out what the early cancellation fee will be so you can make sure you have enough money to cover it.

How To Choose The Right Car Lease Deal?

Now that we have covered the basics of car leasing, both in terms of Personal Contract Hire and Business Contract Hire, the next step is finding the right car lease for you. There are so many out there that it can be a little overwhelming. So, first thing’s first, let’s look at the considerations you need to keep in mind when looking at car lease deals.
 
The monthly payment needs to be within your budget to ensure that you can always make it.
 
The mileage limit for the deal needs to cover you with enough that you won’t go over the limit.
 
The initial deposit needs to be affordable, as you will have to pay it in one go.
 
With those in mind, your best bet is to take a look through our car leasing deals in order to find the right one. We list a wide variety of deals for a huge range of vehicles, so you’re sure to be able to find one that suits you.