A simples guide

Is car leasing better than buying?

Buying a new car can be an expensive business. Leasing, rather than buying, is becoming increasingly popular in this country. In the US, where leasing originated, 25% of cars in private use are via lease arrangements.

To many of us here, leasing is still a bit of a mystery. So, what does leasing entail, and is it a better bet than buying?

What is leasing?

When you buy a car outright, it’s yours, you own it. A lease arrangement is essentially a long term rental agreement. You get a new vehicle and in return you pay the lease company regular payments for a period of time, usually two to four years.

Depending on the particular lease arrangement you have taken out, at the end of the period you can either:
- return the car
- replace the car and start a new arrangement
- pay a final payment to purchase the car outright

Is car leasing better than buying?

Why would I lease, what’s the benefit?

It might not sound like there is much of a benefit to leasing. You’re simply paying money towards something that might not even be yours at the end of the agreement. Here’s the thing though. It might still make better financial sense to do this, rather than to buy the car.

To understand why, think about what happens when you buy a new car. Let’s say the car costs you £20,000. Almost as soon as you’ve got the car home to your driveway, it has depreciated significantly. The AA reckon that on average this is by 20% but depending on the make and model, it can be anything from 10% to 40%.

So, let’s assume your car loses value at an average rate, your £20,000 car is now worth £16,000 if you came to sell it. It’s essentially lost £4,000 in value.

There’s more. This of course assumes that you had the £20,000 in cash to buy the car upfront.

If you had to borrow to purchase the car you’re likely to have arranged finance at an interest rate of anywhere between 6% and 12%. When you factor this in, your ‘dead money’ from purchasing is now the depreciation amount plus the cost of financing.

Leasing costs can also be cheaper than you may think, particularly on some larger cars such as Mercedes or Volvo. That’s because the cars typically hold their value better and the lease firm can afford to charge relatively low lease fees whilst making money from the resale of the vehicle.

Other advantages of leasing

One obvious advantage of leasing is that you don’t need to find all of the money upfront. You’ll usually pay an arrangement fee, some sort of upfront payment and then follow up with a series of regular payments. If you pay more upfront you’ll typically pay less each subsequent month and vice versa.

Check with your lease company about maintenance costs as some companies will cover this for you. This will be subject to some terms and conditions but if something brakes, it will be replaced at the lease firm’s expense, not yours.

Your road tax will also be covered by the lease company as the vehicle is still legally owned by them.

advantages of car leasing

Things to be aware of

All lease agreements come with a mileage allowance and it’s really important you don’t exceed it. There are often fees involved if you do. This is because the more mileage you clock up, the less the car is worth to the lease firm when they sell it on.

For younger drivers, insurance can be a very significant expense in the early years and you’ll need to factor this into the equation.

For some people that’s all well and good but the idea of owning the vehicle outright is what’s important to them.

If you’re interested in leasing as an option, you’ll need to do your own sums. Find the cheapest price you can. Factor in depreciation costs by looking at second hand values. If you’re borrowing, look at the total financing cost. Finally compare these costs to the lease arrangements you find.

Also don’t forget you’ll need insurance, so be sure to use our comparison service to find the right car insurance for you.

Whichever route you take, good luck with the new car.

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