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How Does Car Leasing Work?

21st Dec 2021
How Does Car Leasing Work?

A new car is a big investment. As the cliché goes, it’s the second most expensive purchase in our lives, after a property, and can involve shelling out a lot of money.

While a car is a big investment, it’s one that starts to depreciate as soon as you take possession and drive it. Your car 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. It’s a good thing that our houses don’t depreciate in the same way.

Unless your car is something a little special – rarity always makes a car more valuable, for example – you’re unlikely to keep your car forever. You will eventually sell it, unless your last trip in it is to a scrapyard, but you won’t get what you initially paid for it.

Buying a new car is the traditional way of doing things, but the world has moved on. Today, just under 94% of new cars are leased, rather than bought. We’ve all got used to paying for our smartphones over a year or two, then upgrading to the next new model. A car costs quite a bit more than a smartphone, but most new car buyers seem to be comfortable enough making regular payments, as they do with a phone.

Welcome to the world of car leasing.

What is car leasing?

You can lease a car in the same way that you lease a house. You pay a deposit and regular rent in return for use of the house. At the end of the time agreed in the original contract, you return the house to its owner and you pay for any damage.

Car leasing is pretty much identical. Again, you pay a deposit, make regular monthly payments and hand it back at the end of the agreed term – and you have to pay for damages.

Just as when you rent a house you never own it, you also never own any car you lease.

How do I lease a car?

Type car leasing into your search engine of choice and you’ll quickly discover just how many companies are involved in the business. You can sign a lease deal at your local franchised dealership with the car brand, with a specialist car leasing company, a broker or a host of finance companies.

Once you’ve decided on what model you want, you agree your annual mileage, the level of your deposit and subsequent monthly payments, and how long you want to keep the car. It’s quite easy to shop around online and compare deals, because they’re all publicised with clear figures.

A leasing company might display a suggested deposit and monthly fee, but there are usually options. For example, you can decide to put down a larger deposit, equal to six monthly payments, and then make a further 23 payments for a two-year deal. If your monthly payments are £200, you’ll pay a deposit of £1,200: but if you just put down a deposit of one or three months, your monthly fee will be more.

To compare deals, you’ll need to work out the total cost of the lease, which is the amount of the deposit plus all the monthly fees. In the example above, the total cost is £1,200 + 23 x 200 = 5,800. There will probably be some sort of processing fee, which you’ll also have to add to the total.

Armed with this amount, you can compare the cost with what’s being charged by other companies and find the best deal for the car you want.

After the end of the agreement, you hand the car back. If you’ve covered more miles than you agreed, you’ll have to pay an additional fee. The same goes for any damage to the car, beyond reasonable wear and tear.

Then you find the next new car you want, sign another lease and the process starts again.

 

 

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