Car leasing
Leasing is a way to get behind the wheel of a shiny new car without having to pay a huge lump sum in advance. Our car leasing guide explains how the process works and how to get the best car lease deal.
Leasing is a way to get behind the wheel of a shiny new car without having to pay a huge lump sum in advance. Our car leasing guide explains how the process works and how to get the best car lease deal.
What is car leasing?
Car leasing is a form of long-term vehicle rental. You make an initial payment, then further fixed monthly payments throughout the length of your contract. This will typically run from two to four years.
When the lease ends, the car goes back to the provider. There’s no ‘balloon payment’ option that allows you to buy the car outright at the end of the contract, as with some car finance deals.
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Car leasing, also called contract hire, has grown in popularity in recent years as an alternative to traditional car ownership. It offers flexibility to motorists who like to upgrade their car regularly, or businesses that want vehicles without the cash outlay.
How does car leasing work?
You can apply online to lease a car from a finance company or directly from some manufacturers. Here’s how the process works in five easy steps:
1. Search for a deal
There are various car leasing comparison sites online that you can browse to find the car you want at a price you can afford. When shopping around, it’s also important to read customer reviews of leasing companies to make sure they’re reputable.
2. Customise your deal
You can choose the length of your leasing term, initial payment and mileage limit before getting a quote. These will all have a bearing on your monthly payments, so are important considerations.
You should estimate your annual mileage as accurately as possible to avoid charges at the end of your lease, but you can usually adjust the other variables to fit your budget. You can also bundle in extras, like maintenance and colour upgrades, into your monthly payment.
3. Apply for car finance
Once you have a quote you’re happy with, you’ll be asked to complete a finance application. This involves providing detailed personal information, such as proof of address, income and bank details.
You’ll need to pass a credit check to lease a vehicle, which will show up on your credit file. If you’re approved, your new car will be ordered from the supplying dealership.
4. Take delivery of your car
After the vehicle has arrived at the dealership and been checked over, you’ll be contacted to arrange delivery. The car will normally be delivered straight to your home or work address.
Cars already in stock can take less than three weeks to arrive, while a bespoke factory order can take up to six months.
When you receive the car, check for any damage or scratches, and make sure you’ve received your warranty and service book. Don’t sign for the delivery unless you’re completely happy with everything.
5. At the end of the lease, hand back the car
Once your lease contract is up, your car will be collected and returned to the finance provider.
As long as it hasn’t been damaged beyond an acceptable level and you’ve stuck to the agreed mileage, you shouldn’t have anything more to pay. You’re then free to start a new lease agreement for a brand-new car.
Car leasing options explained
When choosing a lease deal, you’ll be able to select different options to get a personalised quote. The cost to you will depend on factors such as:
- Type of car. You’ll be able to choose from a range of cars, from budget-friendly and family models to electric and automatic vehicles. Obviously, a top-of-the-range BMW is going to cost more each month than a Fiat hatchback, but there may be discounted deals you can take advantage of.
- Length of lease. You can spread the cost of the car for longer by choosing a longer lease agreement. But although this could make your monthly payments cheaper, you'll be tied to a contract for longer and could end up paying more overall.
- Initial payment. How much you spend upfront will have a significant impact on your monthly costs. The higher the initial payment, the more you can reduce the total amount owed overall, lowering your monthly repayments.
- Annual mileage. A high annual mileage will increase your monthly payments because this quickens the car's depreciation (loss of value). This means the finance provider won’t be able to sell it for as much as a lower-mileage car.
How to lease a car
Even though you don’t own the vehicle, you still have certain responsibilities when leasing a car. These will be set out in your lease agreement. To lease a car, you’ll need to:
Make an upfront payment
At the start of your car lease agreement, you’ll have to make an initial lump sum payment (sometimes referred to as a car leasing deposit). This is usually the equivalent of one, three, six or nine months' worth of the total lease cost.
There will also often be an admin fee to cover the cost of registering the vehicle and setting up the lease.
Pay in monthly instalments
After your initial payment, you’ll make monthly repayments throughout the lease term. These payments are fixed, making budgeting easier, although you may have to pay extra for your car’s vehicle excise duty (VED) if it increases in the new tax year.
If you ever find you’re struggling to make your repayments, contact your lender as soon as possible to see if they can restructure your payment plan. If you keep missing payments, the lender could take back the car.
Stick to your mileage limit
When you lease a car, try not to go over the mileage limit agreed in the contract. If you return the car with a higher mileage than arranged, your lease provider will charge you a fee.
This fee, called an ‘excess mileage charge’, will be clearly stated in your lease agreement. Typically, it’s around 10p per mile but this will depend on the vehicle specs.
Look after the vehicle
You’ll need to make sure the lease car is kept in a roadworthy condition, with an up-to-date service record.
You’re also liable for repairing any accidental damage to the car, whether it’s a cracked windscreen or damaged bumper.
Can I get car leasing with insurance included?
In most cases, insurance won’t be included in a car lease deal. Unless you have a ‘Total Care’ package, you'll be responsible for taking out car insurance for lease cars yourself. A lease agreement will, however, usually include road tax.
As part of the contract, you’ll usually be expected to have comprehensive cover in place, and you may need to provide a copy of your insurance certificate before taking delivery of your vehicle.
Even if car insurance is included or available as an add-on, it’s important to make sure you’re getting the cover you need at the right price. You might find a better deal by comparing car insurance quotes rather than just going with what the leasing company offers.
Is car leasing a good idea?
Whether leasing or buying a car is right for you will depend on your personal circumstances and priorities.
Leasing can be a good option if you don’t have the budget to buy a car or like the idea of driving a new car every couple of years without the hassle of selling or trading in your old car.
However, if you’d rather own your car outright and want to avoid mileage limits and other admin fees, buying a car might be more suitable for you.
Advantages of car leasing
Some of the main benefits of leasing a car include:
- Lower upfront costs than buying
- Fixed monthly costs for easy financial planning
- Being able to drive brand-new cars, including electric vehicles
- Less chance of maintenance issues with new cars
- No obligations to buy or sell the vehicle at the end of the contract.
Disadvantages of car leasing
While leasing has many benefits, it also comes with a few downsides too. These include:
- Never owning the car
- Potentially more expensive overall than buying
- Charges for excess mileage and damage
- Penalties for missed payments or early termination.
What our expert says...
“It’s important to weigh up the pros and cons and understand what’s involved to work out whether leasing a car is a good financial move for you. Be sure to compare your options and choose the deal that best fits your household needs and budget.”
- The Editorial Team, Experts in personal finance, insurance and utilities
How to find the best car lease deal
If you're in the market for a new car, follow our tips on how to find the best car lease deals:
- Check listings at specific times – you’ll often find good deals in March and September when new cars are registered.
- Compare prices – having access to different leasing providers helps ensure you're not paying over the odds for your new vehicle.
- Check out special offers – keep an eye out for discounted lease deals. These can be a great way to save on popular models.
- Choose a shorter lease term length – although a longer contract term will keep your monthly payments down, you’ll likely pay more overall. This is because the rental covers the depreciation of the vehicle.
- Avoid optional extras – metallic paint, leather upholstery and fancy wheel trims are all very appealing. But try not to get sucked into paying extra for features you don’t really need.
Summary
- Drive a brand-new car
- Make an initial upfront payment, then pay in monthly instalments
- Stick to your mileage limit to avoid extra charges
- Compare car insurance quotes with us to see if you could save when choosing cover for your lease car.
Frequently asked questions
Is it better to lease or finance?
Leasing can be a good option if you’re not keen on taking out finance or buying a car outright and like to drive a new car every couple of years. But remember that you’ll be charged for going over your mileage limit and you’re paying for a vehicle you’ll never own.
If owning a car is important to you, buying a car on finance may be a better option. But you’ll need to pay road tax, and maybe a balloon payment if you want to keep the car.
How does business car leasing work?
Business car leasing is for companies and employees who need cars for business-related activities.
The main difference between personal and business leasing is that a VAT-registered company can claim back VAT on their lease agreement.
If the car is used solely for business purposes, you can claim back up to 100% of the VAT on monthly payments. If the car is used for both business and personal use, you can claim back 50%.
Business lease deals also tend to offer higher mileage limits because of the longer distances typically travelled.
What does leasing a car include?
All car lease contracts generally come with road tax and delivery of the vehicle to your door as standard. Repairs covered under the manufacturer’s warranty should also be included.
Maintenance packages typically aren’t included, but they can be added to your leasing plan for an extra cost. In most cases, this covers your annual servicing, tyre replacement and other repair costs that might not be included in the manufacturer’s warranty.