Is car leasing better than buying?
Buying a new car can be an expensive business, but an alternative option could be leasing, which is beginning to see a rise in popularity. Latest industry figures estimate that there are more than five million leased cars on UK roads today.
But for many of us, leasing is still a bit of a mystery. So what does it entail and is it better than buying?
Buying a new car can be an expensive business, but an alternative option could be leasing, which is beginning to see a rise in popularity. Latest industry figures estimate that there are more than five million leased cars on UK roads today.
But for many of us, leasing is still a bit of a mystery. So what does it entail and is it better than buying?
What is leasing?
When you buy a car outright, it’s yours, you own it. With leasing, you don’t actually own the vehicle. A lease arrangement, also known as purchase contract hire (PCH), is essentially a long-term rental agreement. You get a brand-new vehicle and, in return, you pay the lease company monthly payments for the length of the lease, typically two to four years.
Depending on the lease arrangement you’ve taken out, at the end of the rental period you can either:
- return the car and walk away, or
- replace the car with a brand-new model and start a new lease arrangement.
Is leasing cheaper than buying a car?
It depends on your circumstances. While it might not sound like there’s much of a benefit to leasing, as you’re simply paying money towards something that won’t be yours at the end of the agreement, in some cases it might make better financial sense to do this, rather than buy the car.
For example, let’s say a new car costs £20,000 to buy. Almost as soon as you’ve driven it away from the showroom, it has lost value (depreciated) significantly. This can be anywhere from 10-40%. On average, after three years, the depreciation could be as much as 60%. So, your car will be worth just £8,000 – you’ll have lost £12,000. If you had to borrow to purchase the car, you’ll also need to factor in the interest on the finance, which could be anywhere from 4% right up to 20%.
With leasing, you pay the difference between the price of a brand-new car and its depreciation value once the agreement is over, plus VAT at 20% and interest. After an initial lump-sum deposit, the payments are spread out over the term of the lease arrangement into monthly instalments.
So, if your agreement is for three years, you get to drive a £20,000 car that, in the end, only costs you a total of £8,000 plus VAT and interest. So instead of losing a potential £12,000 plus any cost of a loan, you’ll only have ‘lost’ £8,000 plus tax and interest.
What are the other advantages of leasing a car?
- Leasing can be particularly advantageous on premium cars that hold their value better as the lease firm can afford to charge relatively low lease fees, while making money from the resale of the vehicle. So, you get to drive a prestigious car that you may otherwise be unable to afford.
- Your road tax will also be covered by the lease company as the vehicle is still legally owned by them.
- Some companies also cover maintenance and servicing – subject to terms and conditions.
- Lease payments are also tax deductible. VAT-registered businesses can reclaim 50% of the VAT as well as the interest on the repayments.
What do I need to be aware of when leasing a car?
- All lease arrangements come with a limited mileage allowance. It’s really important that you don’t exceed it, as you’ll have to pay a fee – usually about 10p a mile, and often much more for prestigious vehicles. If you know you’ll exceed this mileage (or your mileage requirements exceed the maximum a lease allows), leasing may not be for you.
- When you return the vehicle, the lease company will make allowances for fair wear and tear. But if the car’s damaged or has excessive scratches and dents, you’ll have to pay to get it fixed yourself.
- As the car is owned by the leasing company, you won’t be able to modify it in any way without their permission.
- If you want to end the lease arrangement early, you’ll be charged an early termination fee, which is normally a minimum of 50% of the remaining repayments.
- You’ll also need car insurance, so that’s another cost you should factor into the equation. Bear in mind, the higher the value of the car, the higher the premiums are most likely to be.
Buying a car vs leasing?
While buying a car outright means stumping up the cash straight away, it has some advantages over leasing:
- You’ll own the car 100% as soon as you drive it away
- No interest or admin fees to pay
- No mileage limits
- No damage fees
- You can modify it
- You don’t need to worry about credit checks
- It could offer better value long-term, if you plan to keep the same car until it’s on its last legs
- You can sell the car whenever you like
- You can part-exchange if you want to upgrade.
How else could I finance a car
If you don’t have a wad of cash and you don’t like the idea of effectively ‘renting’ your car, there are other car finance options to consider:
Hire Purchase (HP)
You spread the cost of your car over several months. Once you’ve made the final payment, the car is yours and you become the legal owner.
Personal Contract Purchase (PCP)
This is much like PCH leasing, but the difference is you have the option to put down a final payment, known as a balloon payment, and buy the car at the end of the lease agreement.
Personal loan
This could be one of the cheapest ways to buy a car outright. Most lenders offer loans up to £25,000, and you can pay back a fixed amount over a fixed period of time – usually between one and five years.
0% purchase credit card
Depending on the cost of your new car, it might be worth buying it with a 0% purchase credit card. You can then pay back what you owe, interest-free, for a set period. Just make sure you pay back the full balance before the 0% introductory period ends, or you’ll be hit with high interest charges after that.
Top tipDon’t be swayed by low monthly instalments – you should work out the total cost over the entire contract to see if it makes economic sense to lease. Ideally, you’d want the overall amount to be less than you’d expect your car to lose in value if you’d sold it yourself. |
Where can I compare car insurance?
Our car insurance comparison service is a quick and easy way to compare a range of quotes and find the right level of cover for you, regardless if you’re buying or leasing.
Compare car insurance quotes with us in a matter of minutes and see if you can start saving on your new car.
Frequently asked questions
How much deposit would I need to lease a car?
It depends on the leasing company, but it could be anywhere between three to nine times your usual monthly payments. So, if you have a 24-month contract on a 4+23 agreement at £150 per month, you’d pay an initial deposit of £600 in the first month, then £150 per month for the remaining 23 months.
Typically, the higher your deposit, the lower your monthly payments should be.
Do I need a good credit rating to lease a car?
Yes, you do. When you apply for a leasing contract, you’ll need to pass a credit check. This is so the leasing company can assess if there’s a risk that you can’t make the monthly repayments. If your credit score is less than excellent or good, it’s unlikely you’ll be offered a leasing contract.
Can I part-exchange when I lease a car?
No, you won’t be able to part-exchange your old car for a leased car.
Can I take a lease car abroad?
If you want to drive your lease car abroad, you’ll need to get a VE103 vehicle on-hire certificate from your leasing company. This gives you permission to drive a lease car in the EU.
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