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How does car leasing work?

  • What is car leasing?
  • What to know before leasing a car
  • Why it's the better short-term solution

According to Parkers' own research, a whopping 80% of people polled chose to lease a car because it means they can drive something better than they would be able to compared with buying a car in cash.

Those stats add up too. In the short term, leasing (sometimes called Personal Contract Hire) can look like very good value for money. £200 per month for instance, can land you a practical hatchback, a slinky coupe, or a high-riding SUV.

Buying outright, whether that be with a bank loan or via a Personal Contract Purchase or Hire Purchase agreement, can work out cheaper over a long-term period because you'll eventually own the car and will stop having to make payments on it. But that does mean having to keep a car for between six and 10 years to see a saving, depending on what stats you read.

And this long-term car ownership strategy is at odds with our own research. According to our latest analysis, those 'buying' on finance are significantly more likely to be changing cars because they want a new car, not because their old car is beyond economical repair. 

            

How does car leasing work?

Car leasing works like a long-term car rental. Drivers put down an initial payment (sometimes incorrectly referred to as a deposit), which is then followed by a series of fixed monthly payments. In exchange, drivers get behind the wheel of a brand-new car. At the end of the agreement, the car is returned and the process starts again.

Leasing is highly regarded as a hassle-free form of driving, as road tax and breakdown cover are generally bundled into the cost.

As ever, there are some terms and conditions attached. You don't own the car, the leasing company (sometimes referred to as the finance company) does. When you hand it back, you will have been expected to keep the car in good condition, although leasing companies do expect reasonable wear and tear. You're also responsible for the servicing, although some leasing companies can bundle this cost into your monthly payments.

You also have to abide by a yearly mileage cap, sometimes called the agreed mileage limit. You set the number of miles you think you'll cover at the start of the contract, they generally range from 6,000 to 20,000 miles a year, and the leasing company will charge you for every mile you go over your agreement. Expect additional fees for any damage on the car, too.

Car finance deals:

What to know before leasing a car

How does car leasing work?

Before entering into a leasing agreement, you should really know the following:

How much you can afford to pay

This might be pointing out the obvious. But it is worthwhile pointing out. For most people at least, the monthly price is the most important factor when choosing a new car. A quick rule of thumb; it's recommended that you spend between 10 and 30% of your income on a car. With leasing you'll never own it - so it can be brought down even more, as low as 5% if you want. If you're a petrolhead you might want to spend even more, and if you're only going to cover a few thousand miles a year or less, it's worthwhile spending less.

What car you want

Easily the most fun part of the process. You want or need a new car, you've chosen leasing, and you know how much you want to spend. Now it's time to think about the car. There are hundreds of different new cars on the market, but as a yardstick, you'll want something that meets your needs AND something you actually like and want to get in and out of every day, because you'll be using it for the duration of your contract. Want some help? Check out our car reviews.

How many miles you cover a year

Look at your regular driving habits and figure out how many miles you cover in a year. This has an effect of the total cost of the agreement. Go too high with your mileage limit and you're throwing money down the drain. Too low, and you'll pay for it with additional mileage fees.

Where to find the best leasing deals

In the money-saving-expert world we live in, deals are an everyday part of people's shopping habits, and it's the same for cars. Once you know how much you're going to spend, and what car you want, get searching for deals. Our own Dealwatch page is updated weekly with the best car leasing deals, as well as the best PCP deals and cash deals too.

What happens at the end of a lease?

Once you've picked your deal, paid the initial payment, and paid all of your monthly instalments, your contract is up. Now you return the car and look for a new one. Watch out for the end-of-contract lease charges too.           

Find out more about car finance: