No deposit car leasing explained

  • Leasing requires an initial payment, not a deposit
  • Why it's better to put down some money
  • What's the difference between a PCP and a lease?

Car leasing, no deposit

Leasing is well known for offering up the cheapest monthly car payments. But it's also one of the simplest forms of finance to get your head around. You usually make an upfront payment (more on than later) followed by a set number of fixed monthly payments, then before you know it, it's time to hand the car back.

No deposit car leasing deals work like any other car leasing agreement. But instead of paying a fee up front, that money is divided between your monthly payments. So remember, the lower your deposit, the higher your monthly payment.

To throw a spanner in the works, it's important to stress that when leasing, you technically don't pay a deposit. You pay an initial payment.

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What is an initial payment?

Technically, with car leasing, you don't pay a deposit. You put down an initial payment or initial rental. It's not a deposit because it's non-refundable, and it's not linked to the condition of the car on its return at the end of the agreement.

You pay it before you receive the car and it's usually a multiple of the monthly payments, typically ranging from between three and ten months.

It's important to remember that paying the initial rental doesn't reduce the total number of months that the deal runs for. For example, if the deal is over 36 months, you might pay an initial rental to the value of three months' payments but still have 35 monthly payments to make.

The initial payment will be collected when you order the car and typically paid by bank transfer or a card. If you don't pay it, you don't get your car. The subsequent monthly payments are likely to be taken by direct debit.

Why it's better to pay a deposit (initial payment)

Although an initial payment doesn't shorten the length of the lease, it does help to reduce the value of your monthly payments since you are paying back more of the money in one go. In short, the more you pay upfront, the less you pay each month, and vice versa.

Remember, though, that unlike some deposit payments, an initial payment is non-refundable.

>> From our sister site CarZing: the best car finance deals with no deposit

Car leasing with no deposit if you have bad credit 

If you're after a car leasing deal with no deposit (initial payment) and you have bad credit, then unfortunately, we have bad news for you. Ideally, you need a good to excellent credit rating in order to be eligible for personal leasing with no deposit. Why? Because if you have a poor credit score, you're more likely to default on the money owed.

If you have a bad credit rating, paying the initial rental reduces the amount you have to borrow, meaning the finance company that organises the finance for your car might look more favourably on you.

>> How to get car finance if you have bad credit

The difference between PCP deposits and leasing deposits (initial payments)

Businesses have understood the value of leasing for years. Simply, it's a way of financing a portion of the total cost of a car over a fixed term, typically 12 months for a short-term deal, and around three years for a long-term one.

In that sense, it's like renting except that the company is responsible for servicing, insuring and taxing the car.

The point is, though, that at the end of the term, the car is returned to the leasing company and a new car organised in its place.

Under the terms of a Personal Contract Purchase (PCP) deal, where like leasing, only a portion of the car's total price is financed, there is no duty to return the car at the end of the term. Instead, the customer has three options: put any equity in the car (the difference between its official forecast value, also called the Minimum Guaranteed Future Value (MGFV), and its actual trade value which may be higher) towards a replacement, pay the MGFV and keep it, or return it and walk away with, all being well, nothing more to pay.

Regarding a PCP, this deposit is not based on a multiple of the monthly payments that lie ahead but is simply a figure that's likely to be a percentage (usually 10%) of the sum that's being funded – that is, the difference between the car's price and it's minimum guaranteed future value.

In fact, in some cases, the manufacturer also chips in with an additional sum of money called a deposit contribution. This helps to bring down the monthly payments lower still and can also be thought of as a discount.

Also, some PCP deals may only require a token deposit of £99 from the customer or even no deposit at all. This avoids having to find a larger sum of money upfront, but it comes home to roost in the form of higher monthly payments.

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