How Does Car Leasing Work and Is It Worth It
Car leasing has become a popular choice in the British automotive market, although it’s rarely called as such. You might have seen it called something like a “Personal Contract Hire” or “Personal Contract Purchase” or a similar name. All of these names indicate one form or another of leasing, usually differentiated by some unique terms within the agreement.
So, what exactly is car leasing? How does it work? Is it just like renting a car when you go on holiday, but for longer? If so, wouldn’t that be a rather expensive way to have and operate a car? In today’s blog, we’re exploring such questions and others, all related to car leasing.
What is Car Leasing?
Car leasing is a kind of financing arrangement through which a consumer can acquire a new car, usually a brand-new model, pay monthly installments for the use of the vehicle over an agreed-upon period of time, and then either purchase the vehicle at the end of the contract period, or return it to the dealership or leasing company. We’ll cover more details on the workings of car lease agreements in the next section.
Car leasing is an alternative to a traditional car loan. A regular loan allows you to acquire a vehicle, use it as you wish and pay for it over a period typically of 3-5 years in equal monthly payments that include interest. The longer your loan period, the lower the monthly payments usually are, but the more interest you will pay overall. A lease agreement is one that focuses instead on the user simply paying for the depreciation of the vehicle before returning it at the end of the lease period. The monthly payments are typically less than those of a loan.
How Does Car Leasing Work?
There are some different approaches one can take when leasing a car, but the main procedure is as follows and occurs between the person leasing (lessee) and the dealership offering the lease (lessor):
Step 1: The lessee chooses a car they like, usually from a car dealership, but also possibly from another online platform or leasing specialist. Most car leases are done on brand-new cars, but you can also get them for used cars.
Step 2: The lessee and lessor agree terms, including a deposit, monthly payment rate, annual mileage and term length. For car leasing, the most common term length is 3 years but it is possible to sign longer if the lessee wishes or the lessor permits. Most choose a brand-new car and 3 years because that means the car won’t need serious maintenance or an MOT test for the whole time that they have it.
Step 3: The lessee signs the lease, pays the deposit and can then drive the car away and use it for the full duration. For the duration of the lease, the lessee is bound by the certain conditions, including having to make monthly payments, and also sticking to the annual mileage limit. If the lessee exceeds that limit during their usage period, then the lessor will charge an additional fee per mile later on.
Step 4: When the lease period is almost up, the lessor will confirm with the lessee what they want to do next. The lessee typically has three options:
- Option 1: Return the car and end the lease
- Option 2: Pay a final balloon payment and then own the car outright
- Option 3: Return the car in exchange for a new one on the same or similar terms
Many choose option 3 because it essentially means you get a brand-new car every 3 years without any major expense. When you return the car, you may be subject to certain surcharges. If you exceed the annual mileage limit, you’ll be charged for every mile over the limit you are, typically somewhere from 4-10p per mile, depending on the car brand. If there is any damage to the car, you also have to pay for that.
Step 5: The lessor will take returned cars and sell them as used vehicles, or perhaps lease them again as used cars for lower prices. With the depreciation covered in the leasing costs (with some profit/interest), then the dealership can sell the car as a used vehicle and clear a nice profit in total on that single unit.
Pros and Cons of Car Leasing
So, now we understand how leasing works, let’s consider the pros and cons of the arrangement.
First, leasing offers drivers terrific flexibility since they can own a car for a short period and then return it to the dealership with little or no fuss. In this way, they don’t have to worry about selling the car, transferring ownership and whatnot. What’s more, since many leased cars are brand-new, there is very little maintenance cost, and the likelihood is that you won’t ever have to take the car for an MOT test.
Another benefit of leasing, then, is that users can enjoy more car for their money since the monthly costs are often much lower when one leases compared to when getting a traditional loan. This is because you’re only really paying the depreciation cost, and not the full finance cost.
On the negative side, a car lease can unintentionally turn into a more expensive car driving experience, especially if one underestimates their annual mileage or if you accidentally incur some damage on the car before returning it. Some leasing companies have very clever ways of getting additional charges imposed regardless of how good a condition you believe the car to be in when you return it.
Finally, the biggest downside to leasing is that you pay for the car over 3 years but never gain any equity in it. The only way to gain equity is to pay the massive balloon payment at the end, which only puts you in possession of a much-devalued 3-year-old car that you now have to start maintaining and passing through MOT tests. Not owning the car is unacceptable for some.
Conclusion: Is Car Leasing Worth It?
Ultimately, car leasing is just another option among many for getting yourself a car. It’s definitely not suitable for everyone, but that by no means makes it a bad idea in itself. Some will always argue against car leases, in particular pointing to the fact that you’re spending money for no real equity in the vehicle. Others counter that by pointing to the flexibility of leasing, especially in a world where three model years can make a huge difference in the features of a car.
In the end, it’s up to the individual consumer to decide.