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Car leasing contracts explained

Car leasing contracts explained

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

In this guide, we’ll explain all aspects of an electric car leasing contract, from how long they last to the differences between finance methods.

How long are leasing contracts?

The standard terms for most car leasing agreements are:

  • Two years (24 months)
  • Three years (36 months)
  • Four years (48 months)

As a general guide, the longer the lease, the lower the monthly payments – that’s because you’re spreading the cost over a longer period.

Three years is often the sweet spot for leases as you’re covered by the manufacturer’s warranty for the duration and don’t have to worry about MOTs (these only become mandatory after a car is three years old).

Short term leases are available if you don’t want to commit to two years with some companies specialising in leases for just a handful of months.

You’ll likely find that the monthly payments over this duration are much higher than more standard lease agreements.

How much do leasing contracts cost?

The cheapest leasing deals vary month to month with many providers offering promotions 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. 

You can view GRIDSERVE’s latest in-stock deals or look through our special leasing offers to find the perfect EV model for you. And don’t forget, we offer lease plans where EV charging is included in your monthly payment too.

Common leasing terms explained

Here at GRIDSERVE, we try to make the leasing process as simple as possible but there will be certain leasing lingo and jargon that you’ll come across when reading through contracts and T&Cs.

Our leasing experts will be on hand throughout your journey to answer any questions but here’s a glossary of the most common terms and what they mean.

  • Capitalised cost: The capitalised cost (cap cost) of a car is its initial purchase price. If you can reduce this with a down payment or trade in of an existing vehicle, then your monthly payments will be less.
  • Residual value: This is what the car will be worth at the end of the leasing term.
  • Acquisition fee: In some cases, a leasing company will charge an admin fee upfront, in return for arranging the lease. It’s worth trying to see if you can negotiate the fee.
  • Lease term: How long you’ll be paying the lease – usually between two and four years and often expressed in months.
  • 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. More miles equals more wear and tear, which lowers the value of the car at the end of the lease, and therefore a higher monthly fee to pay. Make a realistic estimate about your annual mileage because if you exceed it, you’ll have to pay potentially costly excess fees at the end of the lease.
  • 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. Just like renting a flat. 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, leaving you to pay the difference to the leasing company. Gap insurance covers you for this amount. Talk to your leasing company about whether it’s wise to take this out. 
  • Buyout price: It’s possible to end some leasing deals before the contract is up 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. This is also often known as a balloon payment.

Financing an electric car: what are the options?

Personal Car Leasing is commonly categorised under two main finance types: Personal Contract Hire (PCH) and Personal Contract Purchase (PCP). You’ll also often see Hire Purchase (HP) listed which is more like a traditional loan. Our guide to buying vs leasing will explain more about your options but below is an overview.

Personal Contract Hire (PCH)

Personal Contract Hire (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 leasing contract starts, 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)

Personal Contract Purchase (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.

Hire Purchase (HP)

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, 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 are monthly leasing payments calculated?

There are several factors which affect how much you’ll pay for your lease.

Obviously, the more expensive the car the higher the monthly payments will be, but no two leases are the same with each customer able to tailor the contract to suit their own financial circumstances.

What you pay as part of your monthly payment will be most affected by the following:

  • The car’s value: Often referred to as the purchase price or “On The Road” (OTR), it includes list price including VAT, delivery charges, registration fees and road tax.
  • The car’s residual value: While you don’t have to personally worry about the residual value and being left with a depreciating asset with a lease, the finance company will still take it into account when setting the monthly payment amount.
  • Your expected annual mileage: The more miles you want to drive, the more you’re likely to pay. Most standard leases allow for around 10,000 miles a year but there are some leasing contracts that will let you drive up to 30,000 miles without any excess fees.
  • The length of the lease: Taking out a longer lease will usually net you a lower monthly fee – normal term lengths are 24, 36 or 48 months.
  • The initial payment/deposit: The monthly payment will also be impacted by how much you pay upfront. A bigger initial payment or deposit will mean lower monthly fees.
  • Additional add-ons: If you opt for a maintenance package, for example, this will be factored into your monthly payments.

Am I eligible for a leasing contract?

Anybody who passes our credit checks, has a valid UK driving licence and is at least 18 years old can take out a personal contract hire lease agreement.

If you’ve got any questions, call us on 0333 1234 333 and one of our leasing consultants will be happy to help.

How to end your leasing contract early

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

Some leases allow you to offload your leasing car before the end of your term by trading the lease to someone else who wants the car – a bit like subletting a flat or reselling tickets to a gig. Not all finance companies will allow this so make sure you check your T&Cs.

If you do 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 and honest about such issues is always the best policy.

If you can’t make payments, the finance company will likely repossess the car and you’ll probably still have to pay the outstanding lease payments and repossession costs. Your credit score might suffer as a result, too.

What happens at the end of a leasing contract?

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.

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