Coronavirus - Get the latest updates and resources from MyWalletHero - Find out more.
Advertiser Disclosure

How does car leasing work?

How does car leasing work?
Image source: Getty Images


When you need a new car, leasing is one of the car financing options available. Previously, it was mainly the preserve of companies. But recently, personal car leasing has become quite popular in the UK, so here’s a useful guide on how it works. 

What is car leasing and how does it work?

A car lease is basically an agreement to rent a vehicle for a period of time (usually 2 to 4 years) instead of buying it. In the private car market, leasing is also known as personal contract hire (PCH).

The way car leasing works is quite simple. You first make a deposit equivalent to several months’ payments (three months is common) and then pay an agreed amount monthly. Typically, the monthly lease payments are lower than those of car loan payments. 

As with any rental agreement, you’re responsible for routine maintenance of the car. However, if something major occurs, such as engine failure, the leasing company will most likely take care of it. Some lease companies also have a maintenance package that you can take up for an extra fee on top of your monthly payments. 

One thing worth noting is that when you lease a car, you’ll be subject to an annual mileage limit that you mustn’t exceed. Exceeding the mileage limit will result in a penalty fee.

What happens at the end of the lease?

At the end of the lease period, you have two options:

  1. Extend the lease: To avoid any inconvenience, it is a good idea to contact the leasing company before your lease officially expires in order to establish whether the company allows extending a car lease and how this works.
  2. Return the car: You can just drop off the keys and take up another lease for a newer car. As long as the car you’re returning is in good repair and condition and you have not exceeded the agreed mileage, there will no extra fees. If you have gone above the agreed mileage, you’ll most likely have to pay a penalty (of around 10p per extra mile).

If your circumstances change during your lease and you want to return the car early, most lease companies will allow you to do so, but for a fee. Some, for example, might ask you to pay off the lease costs in full. It is therefore a good idea to find out from your leasing company the exact cost of ending a lease early.

Another form of leasing, known as personal contract purchase (PCP), works more or less like the PCH lease. The only difference is that you have an option to buy the car at the end of the lease.

With PCP, the monthly payments you make are based on the value the car will lose through depreciation between the start and the end of the lease period.

What are the pros and cons of leasing?

Pros

  • You can access a new car every few years
  • You make a lower upfront payment for a brand new car
  • You don’t have to worry about the value the car will lose over time
  • You can include a full maintenance package for worry-free use of the car

Cons

  • You won’t own the car 
  • Possible extra costs if you exceed the allowed mileage
  • Extra fees for damage are quite common
  • You’ll always have to make monthly payments

When does it make sense to lease a car?

Ultimately, you are the only one who can decide whether leasing is the right option for you. Here are a few situations, however, where leasing might make sense:

  • You want to drive a luxury car that you wouldn’t be able to afford outright
  • You value flexibility – a lease lets you put off the purchasing decision while still getting to use the car. It’s like having a test drive that instead of lasting a few minutes lasts several years (albeit at a cost).
  • You value the convenience of not having to deal with major car repairs
  • You are self-employed and can write off your lease payments as a business expense

Final word

Whether leasing or buying a car, getting the best deal is the bottom line. So it’s a good idea to do your homework. Even if you’re fortunate enough to afford paying cash for your car, you might still want to investigate leasing.

Dealers sometimes offer such good lease terms that you can come out ahead by leasing. You can then invest the money you would’ve paid for the car in something that might earn you returns over time, such as a stocks and shares ISA.

Content Disclaimer: We have taken reasonable steps to ensure that any information provided is accurate at the time of publishing. The content provided in this article has not taken into account the circumstances of any specific individual, and does not constitute personal advice or a personal recommendation for any individual; neither should it be relied upon by any individual when making any decisions. If you require any personal advice or personal recommendation, please speak to an appropriate qualified adviser.

What next?

If you’re looking for more ways to make your money work for you, why not sign up for MyWalletHero’s email newsletter? You’ll receive our team’s top money-saving tips, lifestyle hacks and handy personal finance ‘must-knows’ – delivered straight to your inbox…

Just enter your email address below to sign up now:

By checking this box and submitting your email address, you agree to MyWalletHero sending you emails with money tips, along with details of products and services that we think might interest you. You can unsubscribe from future emails at any time. You also consent to us processing your personal data in line with our privacy policy, and our cookie statement. For more information, including how we collect, store, and handle personal data, please read our Privacy Statement and Terms & Conditions.


Content Disclaimer: We have taken reasonable steps to ensure that any information provided is accurate at the time of publishing. The content provided in this article has not taken into account the circumstances of any specific individual, and does not constitute personal advice or a personal recommendation for any individual; neither should it be relied upon by any individual when making any decisions. If you require any personal advice or personal recommendation, please speak to an appropriate qualified adviser.

Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.