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Leasing Contracts Explained

22nd Dec 2021
Leasing Contracts Explained

You’ve made the decision: you’re going to lease your next car. Now you just need to make sure that you understand exactly what you’re signing up for.

How long are leasing contracts?

The length of the agreement, or term, is one of the decisions you’ll need to make about the lease.

The standard terms for most car leasing are;

  • two years (24 months)
  • three years (36 months)
  • four years (48 months)

As a general guide, the longer the lease, the lower the payments – but bear in mind that there are a few other factors that can also influence the cost of those payments. Three years tends to be a popular period of time, as you’re covered by the manufacturer’s warranty, and you don’t have to worry about MOTs (which only start after a car has reached three years of age).

However, shorter-term leases are also available, which are designed for people who don’t want a long-term commitment. Some leasing companies specialise in these short-term leases, which can last just a few months. This greater flexibility comes at a price, though: the fees you pay will be much higher than for a more standard three-year term.

If you're not sure what the best option for you is, read our Buying vs. Leasing guide

How much do leasing contracts cost?

The monthly cost of your lease will depend on several factors;

  • the value of the car when new
  • the term of the agreement
  • how much you pay upfront
  • the agreed annual mileage
  • whether you take out a maintenance contract

You should be able to negotiate with the leasing company to find the right balance of fees for you. It’s important to be realistic about how much you can pay each month: work out your budget and stick to it.

If you have any more questions about leasing contracts, check out our FAQs

Common leasing terms

A leasing agreement, like any kind of financial document, will have contain some specific technical terms (jargon, in other words) that you might not be familiar with. On the basis that you should never sign anything you don’t fully understand, familiarize yourself with some of the terms you might find in the agreement you’re asked to sign.

Residual value: This is what the car will be worth at the end of the leasing term.

Capitalised cost: The capitalised cost (cap cost) of a car is its initial purchase price, so you can haggle over its value, just as you would at a dealership when buying outright. This means that you could make a down payment of some kind or trade in a vehicle to reduce the initial purchase price, which should lead to reduced monthly fees.

Acquisition fee: In some cases, a leasing company will charge an additional fee upfront, in return for arranging the lease – another one of those admin fees that we have to pay these days. It’s worth trying to see if you can negotiate the fee, or find a leasing company that doesn’t levy it.

Lease term: How long you’ll be paying the lease – usually between two and four years.

Mileage allowance: One of the factors that determines how much lease agreements will cost is the number of miles that you think you’ll cover annually in your car. More miles equals more wear and tear, which lowers the value of the car. Make a realistic estimate about your annual mileage and then make sure that you don’t exceed it: if you do, you’ll have to pay an additional fee based on how many excess miles you’ve driven, which can be costly.

Money factor: The money factor is also known as a lease factor, lease rate or rent charge and it determines part of your monthly fee. It’s often expressed, confusingly, as a small decimal fraction, but if you multiply it by 2,400, you end up with an interest rate. So, if the money factor is 0.0025, the interest rate is 6%

Security deposit: Some leasing companies require a security deposit, which they keep until the end of the agreement, to cover any damage or excess mileage. If you stick within the mileage and return the car in good condition, you’ll get the security deposit back.

Gap insurance: If your lease car is involved in a collision and written off, your insurance company might not pay the full value of the car, so you need to pay the difference to the leasing company. Gap insurance covers this, er, gap, so some leasing companies insist on you taking out a policy.

Buyout price: It’s possible with some leasing deals to end them before the end of their term by buying the car outright. As the value of the car is reliant on how much it has depreciated, the buyout price might well fall later in the agreement term.

Disposition fee: At the end of your lease agreement, you might have to pay a fee for the leaser to prepare the car for sale on the used market. It’s worth trying to negotiate the fee down (or away) at the start of the agreement, or when handing the car back – which is often the better time, as you can leverage a new lease deal against it.

Purchase option agreement: In some cases, a leasing agreement might specify how much you can buy the car for at the end of the lease.

 

How to end your leasing contract early 

Ending a lease early usually involves paying off the full leasing costs in full, so you’d need to speak to the leasing company to find out exactly what you’ll need to pay.

 

If you're experiencing financial difficulties

If you get into financial difficulties while you’re leasing a car and struggle to make the payments, the first thing to do is speak to your leasing company - being open about such issues is always the best policy.

The end result may be that the finance company will repossess the car and you’ll likely have to pay the outstanding lease payments and repossession costs. Your credit score might suffer as a result. 

If you don’t make your payments and you don't let the finance company know you're experiencing financial difficulties, the car could also be repossessed. You’ll face fines for the unpaid monthly fees and this could be reflected in your credit history and might potentially prevent you from leasing again.

 

How to swap your car in the middle of a lease

One way of offloading your lease car before the end of the end of the term is to trade the lease to someone who wants the car but for a shorter period than a conventional lease.

If you want to transfer a lease, there are websites that will enable you to list it, as you would on a ticket reselling site, with all the necessary details, including what’s remaining of the term.

However, be sure to check whether your finance company first as not all companies will allow you to do this. Be sure to check your GRIDSERVE Leasing terms and conditions as well - you can access them here

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