Is car leasing better than buying?
Is car leasing better than buying?
Buying a new car can be an expensive business. One option could be leasing. It’s been slow to catch on in the UK with only 5% choosing to lease rather than buy a vehicle. But it’s beginning to see a rise in popularity.
To 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 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
- Replace the car with a brand-new model and start a new lease arrangement
- Pay a final payment to purchase the car outright
What are the benefits to leasing a car?
It might not sound like there’s 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. However, in some cases it still might make better financial sense to do this, rather than buy the car.
For example, a new car costs £20,000 to buy. Almost as soon as you’ve driven it away from the showroom, it has depreciated significantly. According to the AA, this can be anywhere from 10-40%. After three years, on average the depreciation could be as much as 60%. So, your car will be worth just £8,000. 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 6% to 12%.
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 + VAT and interest.
What are the other advantages of leasing a car?
- Leasing can be particularly advantageous on luxury cars – such as Mercedes and Volvo. That’s because they typically hold their value better and 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 things 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 between 3p-10p a mile, and often much more for prestigious vehicles
- When you return the vehicle, the lease company will make allowances for fair wear and tear. But if it’s damaged or has excessive scratches and dents, you’ll have to pay to get the car fixed yourself
- As the car is owned by the leasing company, you won’t be able to modify it in any way
- If you wish 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
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.