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Car Leasing: Everything You Need to Know

‘Should I buy or lease a car?’ This article will shed some light on what vehicle leasing is, and why it may or may not be for you.

What is Car Leasing?

Owning a car is one of the biggest responsibilities one makes in life. As such, coming to the decision of what car to get is a big one and understandably daunting for some. Also, how you are going to pay for your car is something everyone should carefully consider.

But, if you don’t buy a car, did you know leasing a car is always an option?

So, what is leasing? And why should I lease a car? A lease in simple terms is: a long-term rental agreement, that offers exclusive use of a car for a set period of time and you will pay for it monthly which makes it a lot easier and cheaper in the long run.

Leasing a car has many benefits, some of which are: You get a brand new vehicle every 2-5 years depending on the contract length you require,  it's usually cheaper than buying a car, you also don't have to deal with the costs typically associated with second hand vehicles.

How Does Car Leasing Work?

The way vehicle-leasing works is that you can pay an agreed sum of money by way of monthly installments on an agreed period, making it easier and more convenient for you when getting a new vehicle in the long run.

Depending on the contract you decide to take out you may be required to put down a deposit at the beginning of your lease, but an alternative is that you can make a lump sum payment at the end.

Desperate for that new car, but can’t afford to pay the big upfront cost of buying a brand new vehicle? Vehicle leasing may just be the change that you need for your life on the road.

How do I know if leasing is for me?  Well, most people in the UK change their car every 3 or 4 years. If that applies to you, leasing may be a much more cost-effective option and may turn out cheaper in the long run.

Different Types of Car Leasing Contracts:

Contract Hire:

Contract hire, often referred to as car leasing, and is perhaps the most popular form of a vehicle leasing contracts available on the market today. This agreement allows a driver to drive a vehicle for a set period of time, but the driver will never actually own the vehicle. Typically, a monthly payment plan is set up for the length of the contract, on completion of which the vehicle is returned to the hire company.

Installments will be decided by an array of different factors, the primary one being the retail cost of the vehicle. Another determining factor is the expected value of the vehicle at the conclusion of your contract. This value takes into account devaluation, expected mileage and other contributing factors. Payments are decided by the variance between these two figures; so higher residual values lead to lower monthly payments.

The pros and cons of contract hire are largely subjective and will very much depend on the individual. For instance, not having possession of the vehicle can be a sticking point for some individuals, but it can be a blessing for those who do not wish to deal with re-sales and depreciation concerns. Many contract hire arrangements will also come with maintenance packages; so all you have to be concerned about it your comprehensive car insurance and running costs.

Pros & Cons of Contract Hire:

Pros:

  • Fixed-cost motoring, allowing you to stay in control of your payments and budget effectively.
  • VAT registered businesses will also find this option beneficial as they can claim back 50% of their total payments and 100% of all maintenance expenses
  • Hire rental tax allowances can also be harnessed.

Cons:

  • You must give back the vehicle on completion of the contract; however, as mentioned previously this may not be an issue for everyone.

Personal Contract Hire

Personal contract hire (PCH) is fundamentally equal to ordinary contract hire but it is only available to private individuals. This represents the most common form of leasing and is what most people refer to as ‘car leasing.’ With a PCH agreement the customer takes control of a vehicle for a set period of time, but never actually owns the vehicle outright.

Instead, once the fixed monthly payment plan has been completed and the contract comes to an end, the customer simply returns the vehicle to the leasing company. Alternatively, you can also take out a fresh personal contract hire lease.

With this type of agreement, the customer does not need to concern themselves with the re-sale value of the vehicle; it is simply returned to the leasing company. Your monthly payments are determined by the difference between the value of the car and the residual value of the car. The latter value takes into account depreciation and a strict mileage limit; going over this limit can result in penalties and charges at the end of the contract.

If you are a business owner, this is probably not the most ideal option for you. Regular contract hire has VAT benefits and other advantages that are not applicable to PCH. On the other hand, private individuals may find personal contract hire perfect; depending on their circumstances.

If you do a lot of travelling the residual value of your car will plummet and therefore increase your monthly installments. Nevertheless, PCH provides fixed monthly payments and the option to take away a new car every couple of years. As long as you do not mind sacrificing ownership of a vehicle, personal contract hire could be ideal solution for you.

Pros & Cons of Personal Contract Hire:

Pros:

  • Fixed prices with no interest charges – on both new and used cars.
  • Monthly rentals are generally lower than those of a personal loan.
  • Road fund licence should be included in the contract.
  • Most PCH agreements allow an optional maintenance package to be added.
  • No need to worry about depreciation or selling the car when contract is complete.
  • Access to high-spec cars that may previously seem unaffordable.

Cons:

  • You will never own the vehicle.
  • As the car is not owned by you, third party car insurance is not an option.
  • No option to purchase the vehicle at any point during the agreement.

Car Leasing May Not Be For You:

Leasing a car isn’t for everyone. One of the main downsides to leasing is that you don’t actually own the vehicle. Alternatively, you can buy the vehicle at the end of the leasing period but bear in mind that this isn’t always an available option because not all vehicle-leasing deals and contracts will allow this.

With leasing, you can only do a nominal amount of miles which are set by you at the quotation stage. Going above this would add an extra charge, however, you can amend your mileage whilst your lease is live should you anticipate you might go over. (This depends on the finance company so it's worth checking with your account manager.)

Leasing also requires good credit. So if you have bad credit then leasing is definitely not for you. You need to have a decent level of credit and a stable financial situation to be eligible for leasing.

Customising your vehicle is a big ‘no’ when leasing, as when your leasing period is up — depending on the contract you have chosen — you will need to return the vehicle to the finance company in the condition you received it. Meaning no third party modification.

If you’d like to mod it, you can of course choose from a list of manufacturer extras to specify the car how you want it. Significant damage will be penalised at the end of the contract, so when the vehicle is returned and damage is found expect extra costs to be added.Minor stone chips and fair wear and tear are allowed, and you are covered by the BVRLA’s Fair Wear & Tear Guide.

Whilst the finance company isn't expecting a new vehicle back wear and tear is understandable. You can find out more about what happens at the end of a car leasing contract here.

Buying a Car: The Alternative

The alternative to car leasing is buying a car. This can be second hand, nearly new or new, like with car leasing you have a number of different options. Depending on your credit you can choose to do a personal contract hire (PCP) which will finance the cost of the car over a set period of time.

You can also buy cash, if you're looking at something a little bit older then you always have the choice of buying cash if you can afford that initially.

Like with leasing a car, buying one also has its pros and cons. The choice between buying or leasing will totally depend on what you need, what you can afford and what works better for you.

Older or used cars may have had many previous owners and done a lot of miles before you even sit in it. Not to mention, as soon as you purchase a vehicle the value depreciates rapidly and getting rid of it when it’s time to buy another car could prove to be difficult.

Overall it's what works for you. If you can afford to buy a new car, then fantastic! But it's what works best for you and what best suits your lifestyle. If you prefer to buy a new car and then have it for the next 5-10 years then great. But if you prefer to have a new car every 2-5 years then leasing may be for you.

If you have any questions about car leasing please don't hesitate to get in touch.

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Posted on 11th May 2017 at 4:10 PM

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