Never leased a car before? Understanding how the process works can be a little confusing and, often, the information out there on the internet just throws buzzwords at you, expecting you to just know what they mean. We understand how annoying and frustrating that can be, which is 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 you feel ready to learn more about each aspect of car leasing after reading this, we also have a selection of in-depth car leasing guides to help you get your head around it all even more. For now though, let’s start with the basics.
What Is Leasing?
When you want to learn about how car leasing works, the first step is to understand what car leasing actually is. 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 a confusing topic to get your head around.
In simple terms, car leasing is the long-term rental of a car. Instead of renting a car for a week or two while you’re holidaying abroad, the rental period for a car lease contract is usually between two and five years. The individual payments are also much smaller than they would be for a short-term rental.
How Does Car Leasing Work?
You get to drive the car for the length of your lease, as long as you keep up the payments, but you won’t have to worry about things like the value of the car decreasing because you give the car back at the end of the lease.
Similar to a house rental, you have to pay an initial deposit for the lease. Then, at the end of the lease period, if there’s any damage you’ll need to cover the cost of fixing it.
Now we’ve got the basics covered, let’s look at the different types of car leasing and how they work 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. Personal car leasing is exactly what it sounds like: a lease deal that you take out yourself, where you cover the costs. The lease 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.
How to Lease a Car Yourself
Personal car leasing is more commonly known 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.
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. We will cover what happens at the end of the lease period in more detail later.
What Is The Difference Between PCP and PCH?
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 a PCH deal, you pay each month and then give the car back, not having to worry about the value of the car degrading. However, with PCP, you actually end up owning the car at the end. This is done through a lump sum payment in 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’s typically less risky financially to use PCH and return the car at the end, before getting another new car shortly thereafter.
What Restrictions Are There On 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 bodykits either. For example, you cannot add a tow bar without getting specific permission first. That said, you can request for modifications like this to be made before you get the car.
- There will be restrictions on the annual mileage for each lease deal. If you exceed that mileage figure, 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 ‘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 an additional charge to pay.
How to Lease a Car Through a Business
Business car leasing is very similar to PCH, with one clear exception: it is carried out through a company so that it can provide cars to its employees. It’s 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 PCH. 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 PCH vehicle are typically applied to BCH deals as well.
What Happens At The End Of The Car Lease?
Whether you opt for a personal or business lease deal, it’s really important to understand what will happen at the end of the lease period 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 fixing them.
Once you have given the car back, you can then look to get a new deal and a new car, starting the whole process again.
Is Car Leasing Right For You?
Now you know the ins and outs of leasing and how the process works, you just need to work out whether it’s right for you. Let’s take a look at the pros and cons to help you decide.
The Pros of Car Leasing
Arguably the biggest benefit of leasing is affordability. Although 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 (like PCP) 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. It’s kind of like 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 of car leasing is that some deals will actually include maintenance fees such as servicing and replacement tyres. This means that you can actually end up saving money because the care of the vehicle is already covered, preventing any unexpected bills from arising.
Are There Any Negatives?
Perhaps the most obvious drawback of PCH or BCH is that you won’t own the car at any point. But although 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 a large enough mileage limit. 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 limits 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 your chosen deal gives you enough miles each year.
How Do Car Leasing Payments Work?
The Initial Deposit
The first payment you’ll need to cover is the initial deposit. This is typically equivalent to either three or six months’ worth of the monthly payments, similar to the deposit you’d pay 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 damage or needs any repairs.
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. Following that, provided you don’t miss any monthly payments your credit score will remain intact.
Can You Extend A Car Lease?
Yes, 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 potential for the monthly payments to be lower.
Can You End A Car Lease Early?
Yes, but you will need to pay an early cancellation fee to do so. This 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 For You
There are so many deals out there that finding the right one can be a little overwhelming. So, first thing’s first, let’s look at the key considerations you need to keep in mind when shopping around.
- The monthly payment needs to be within your budget to ensure that you can always make it.
- The mileage limit needs to be high enough so that you won’t exceed it.
- The initial deposit needs to be affordable, as you will have to pay it in one go.
Happily, there’s a simple way to find a deal that ticks all your boxes. Here at Cars2Buy, you can compare thousands of car leasing deals from a wide range of providers, allowing you to find the right one in a fraction of the time. 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. Explore our site today and filter by make and model to start your search.