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What Is Car Leasing and How Does It Work?

What Is Car Leasing and How Does It Work?

Leasing a new electric car means paying for it in instalments – a bit like your smartphone contract or renting a house. There’s an upfront fee followed by monthly payments over the course of a few years (normally two to four). At the end of the contract, you can decide to hand it back, extend, upgrade or keep the car.

You might not have considered leasing before but it’s incredibly popular – in fact over 90% of new cars are bought with some form of finance rather than outright. One of the big reasons is that you don’t immediately feel the burn of depreciation – that’s the amount of money a car’s value drops the moment you drive it away from the dealership.

A car, whether it’s an EV, petrol, diesel or hybrid, will lose about a third of its value in the first year and can be worth less than half its original cost after three years. With leasing that’s not something you need to worry about. With an EV, leasing also allows you to regularly upgrade your car to keep up with the latest technology rather than be left with an outmoded car.

Leasing offers a whole range of other benefits over outright purchase or other types of finance, too, and can be the perfect way to get behind the wheel of the latest EV model if you carefully budget for the monthly repayments.

Welcome to the world of electric car leasing.

What is car leasing?

Car leasing is essentially a long-term rental – a bit like leasing a flat. You pay a deposit upfront, then monthly rent to live in it, keep on top of bills and at the end of the agreed contract, you pay for any damage beyond fair wear and tear, then move out.

Leasing follows the same pattern – pay a deposit, agree annual mileage and monthly instalments (usually spread over 12, 24, 26, or 48 months) and then cover the cost of running it and settle up for any extra fees when you hand it back to the finance company at the end of the lease term.

Remember, you never own the car when you lease it, but it offers a hassle-free and affordable way of driving a new model, especially if you like to upgrade and switch vehicles every few years.

What are the different types of leases?

Within the world of car leasing there are several different types of leasing contracts, each with their individual rules and benefits. Understanding the differences is crucial to picking the leasing deal that’s right for your circumstances.

What is Personal Car Leasing?

Personal Car Leasing is commonly categorised under two main finance types: Personal Contract Hire (PCH) and Personal Contract Purchase (PCP).

Personal Contract Hire (PCH)

PCH is a hire plan that can offer attractive monthly payments but you do not own the car at the end of the agreement – this is the most traditional form of leasing. There’s likely no deposit although you may have to pay a rental fee upfront (normally equivalent to a few months of instalments). Before your lease you’ll agree annual mileage, fixed monthly payments and term. At the end of the contract – normally between two and four years – you hand the car back.

Personal Contract Purchase (PCP)

PCP is a finance plan where customers have the option to buy the car at end of the lease. You’ll likely have to put down a deposit, anywhere from 0 to 40% of the car’s value, with monthly payments then making up the remainder of the lease. You agree annual mileage, fixed monthly payments and length of lease up front. When the contract ends, unlike a PCH, you’ll have the option of making a “balloon payment” to keep the car and become the new owner. This final payment is optional and if you choose to hand the car back, you can use this amount (known as the Guaranteed Minimum Future Value) towards the deposit of a new lease.

What is Business Car Leasing?

Business Car Leasing, also known as Business Contract Hire (BCH), is similar to PCH – you pick a vehicle, agree terms, pay monthly and hand it back at the end of the term.

The main difference, as the name suggests, is that rather than leasing it for personal use, you’re leasing it on behalf of a business. To qualify for BCH, you’ll need to be a:

  • Limited Company or Private Limited Company (PLC)
  • Sole Trader
  • Partnership
  • Limited Liability Partnership (LLP)
  • VAT-Registered company

Business leasing can net companies big VAT savings (and with an EV, even bigger running cost savings) as well as the flexibility to switch their vehicle fleets every few years without having to commit to owning assets which lose their value over time. Depending on the terms of the lease, you should still be ok to use the vehicle for personal trips alongside business miles, although the tax savings you make will be impacted.

Read our complete guide on business leasing here.

What is Hire Purchase?

Hire Purchase (HP) is for those who know they want to own the vehicle at the end of the payment term. It’s a bit like a mortgage on a new house or a traditional loan, you simply spread the cost of your new vehicle over a period of time – normally two to four years.

Once you’ve completed your monthly payments, you own the car – and there’s no “balloon payment” to pay at the end like there is for a PCP deal. Because of this, you’ll often find the monthly payments are higher than a PCP over the course of the contract as you’re paying off the full amount.

How do I lease a car?

Leasing a car is quite straightforward, with plenty of providers and contract types to give you complete flexibility to select a deal that suits you.

  1. Pick a provider: There’s a wealth of options to choose from, including brokers or leasing specialists, like GRIDSERVE Car Leasing, as well as through your local dealership.
  2. Check your credit score: In order to secure finance you’ll need to make sure you have the credit rating to qualify. It’s worth doing this at the outset to avoid delays later down the line.
  3. Select your model: Do your research into what model you want, whether it’s a compact hatchback or family SUV. Use our handy comparison tool to find your perfect car.
  4. Consider annual mileage: Work out how far you normally drive on a daily, weekly and yearly basis. When you sign up to a lease you’ll need to agree mileage limits – if you exceed these over the course of the lease you may have to pay additional fees when the contract ends.
  5. Calculate deposit and lease length: If the lease requires it, work out what is the best deposit amount and then the term of lease required to bring the monthly payments down to an affordable rate. Leasing companies will often provide representative examples, but you can tailor these to suit your financial situation.
  6. Budget for monthly payments: Once you’re happy with the contract on offer, budget so that you can always pay off your monthly instalment in the same way you would your mortgage or phone contract.
  7. Compare deals: Before you agree to anything, shop around and make sure the deal you have is the best on offer. Companies may offer different rates, payment plans and T&Cs so always check you’re getting the right deal for you.
  8. Sign on the dotted line: Once you’ve dotted the Is and crossed Ts it’s time to sign the contract on your lease.
  9. Collect your car: This is the fun bit… it’s time to collect your keys and drive away in your new car. Once your lease comes to an end, you’ll be able to hand it back and start the process again on a new model.

What are the benefits of leasing a car?

Whether you’re leasing a car for personal or business use there’s a whole range of benefits to be had compared to buying it outright.

  • You pay less upfront: Compared to buying outright, you’ll start making savings straight away with a lease. Deposits start from as little as one month’s payments rather than having to stump up upwards of £20,000 for a new car.
  • It’s an affordable way to drive a new car: As upfront costs are lower and you’re spreading the cost, it means you’ll be able to drive a much newer car with the latest technology and safety kit than if you were buying outright.
  • You get a new car every few years: Hire contracts typically last between two and four years and at the end of each deal you can upgrade to a new vehicle without losing money in the same way you would when selling a car.
  • Monthly payments are fixed: Leasing allows you to budget and keep your finances in check by fixing the monthly instalments for the duration of the lease.
  • You won’t get stung by depreciation: With a lease you never own the vehicle which means the depreciation a new car experiences as soon as it’s driven won’t affect you. There’s no need to worry about residual values and how much the car will be worth after three years.
  • You don’t need to worry about selling: When you want to switch cars, it’s as simple as handing it back at the end of the contract rather than having to advertise or visit a dealer to trade-in and haggle over prices.
  • Road tax, breakdown and MOTs are included: All new lease cars are covered by a manufacturer’s warranty (at least three years as standard) which means most mechanical faults will be fixed. Road tax, breakdown cover and MOT costs are included in your lease payments, too, meaning you’ll only have to worry about routine servicing and maintenance.
  • No wear and tear to worry about: As your lease car will be new, there’s no need to be concerned about wear and tear, which can end up costing you thousands in repairs if you’re driving a used car.
  • You can take advantage of tax benefits: Business customers can take advantage of huge VAT benefits when leasing cars for company use.

Things to consider when leasing a car

Like any financial commitment, you need to make sure that a lease deal is right for you. The benefits are big but it’s not for everyone – especially if your financial circumstances or vehicle requirements are likely to change during the course of a lease, as exit fees can be expensive. Here’s a few other things to consider before signing on the dotted line:

  • Know your budget: Leasing is an affordable way to get into a high-end, new vehicle but don’t stretch yourself. Be realistic about both your deposit (don’t empty all your savings) and what monthly payments you can afford, considering that you’re committed to this repayment for several years.
  • Do you need GAP insurance?: Guaranteed Asset Protection (GAP) insurance protects your bank balance if your lease car is stolen or written off. Your insurer will only pay out on their valuation of the car (which will take into account depreciation) and this will be significantly less than the amount it’s worth to the leasing company. GAP insurance will pay you the difference so you’re not out of pocket. It’s not essential but speak to your leasing company about their T&Cs to understand if it makes sense to take out cover.
  • Don’t underestimate your mileage: Excess mileage fees at the end of a lease can be an unpleasant cost when handing the car back so making sure you’ve agreed a realistic mileage limit at the start of the contract is vital. Think about your yearly mileage over the years and consider if your circumstances are likely to change – generally speaking a 10,000-a-year mileage limit is enough for most people.
  • Long or short contract?: As a general rule, a longer term lease will mean lower monthly payments across the length of a contract, but it also means you’re committed to that vehicle for that length of time. Think about how things might be different for you – both work and private life – to see if shorter term flexibility is more important than initial monthly savings. Cancellation fees can be expensive.
  • Look into a maintenance plan: With a lease, road tax, MOT and breakdown are all covered but scheduled servicing and maintenance is not. If you want to budget for this as well, then look at taking out a pre-paid plan for the duration of the lease which will spread the cost of servicing over the period.

Is leasing a car right for you?

For many motorists in the UK, the answer is yes, with so many people turning to leasing in recent years. For you, leasing is right if you want to drive away a brand new car for a lower overall amount and are not worried about owning the vehicle. It’s also a smart move if you’re keen to regularly switch into a new car and don’t want the hassle of trying to sell a vehicle when you’ve had enough.

Car Leasing FAQs 

Is leasing a car better than buying?

For many, leasing can be a hassle-free and affordable way of driving a new car. You don’t need to worry about depreciation and the upfront costs are significantly less. You’ll also be able to switch vehicles every three years or so without the need to go through the sale process. It’s not for everyone but it has huge benefits for both personal and business drivers.

What happens at the end of a car lease agreement?

For most leases at the end of your agreement you hand the car back, settle any additional fees for damage or excess mileage and then look at starting a new lease. Some companies will offer the option to extend your contract, too. If you’ve taken out a Personal Contract Purchase (PCP) lease, then you have the option of paying a one-off “balloon payment” to keep the vehicle and become the owner.

 What is the cheapest car leasing deal?

The cheapest leasing deals vary month to month with many providers offering offers when new stock comes in, as well as special zero deposit contracts. As a guide, the smallest monthly fee you’ll pay is around £100 for a small hatchback on a three- or four-year lease deal, while £300 a month will get you into a family-sized vehicle. 

 What does car leasing include?

Leasing includes the vehicle use, vehicle excise duty (commonly known as road tax), cover under the manufacturer’s warranty, breakdown and MOT. You’ll still need your own insurance and to pay for scheduled servicing.

 What does initial payment mean when leasing a car?

The initial payment is the amount you need to pay upfront before your monthly instalments start – often also referred to as a deposit. Typically, the amount is six times the monthly payment (a bit like when you move into a rented flat or house), although some leasing companies will offer deals where the initial payment is just one month up front.

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