How Does Leasing a Car Work

1st Oct 2021

How Does Leasing a Car Work

If the time has come to upgrade your wheels, you should consider car leasing. An alternative to outright ownership, car leasing is a contract to ‘rent’ a vehicle. It comes as either a short-term (up to 12 months) or long-term contract (up to four years).

What are the benefits of a car lease?

The benefits of car leasing are many. Firstly, you can guarantee a reliable, modern vehicle that’s more likely to meet 21st Century emissions standards.

There’s also no awkward admin, dealing with pushy salespeople or investigating a car’s background through a private seller. What you will receive is a brand-new, shiny vehicle that’s been approved by industry bodies such as the Financial Conduct Authority.

The two main types of car leasing: business and personal contract hire

When you approach a broker, you’ll be asked if you want a business or personal contract. The main difference between business and personal contract hire is that the former is used for professional means. (If you choose to use the car for both professional and personal means, you will have to pay Benefit in Kind tax.)

Business contract hire

There are many benefits to business contract hire, for example, you can claim between 50 and 100 per cent of Valued Added Tax on the vehicle. One of the factors that affects this is emissions, so always pick a more environmentally friendly car to save cash.

If you do need your company car for personal use, your Benefit in Kind tax (also known as company car tax) will be calculated based on:

• CO2 emissions*

• The value of the car (including upgrades), otherwise known as its ‘P11D’ value

• Your marginal income tax rate

• Your level of access to the car.

To be clear, you will be able to claim 50 per cent of the VAT back if you use the car for business and private travel, or 100 per cent for exclusive professional use. The plus side is that the business can claim 100 per cent of the VAT costs on maintenance (if it’s provided with the car).

*Keep in mind that from April 2020 you won’t have to pay company car tax if you choose a very low emission hybrid or electric car!

Personal contract hire

Thankfully, this one’s a little bit simpler. As the name suggests, this is strictly not for professional use, and as such, personal contract hire is slightly more expensive. However, it’s a great alternative to buying outright, thanks to:

• Simple, fixed monthly payments

• Road tax included

• Courtesy car if yours is off the road

• Flexible leasing times e.g. short or long-term (you can also negotiate these during the contract)

• Optional maintenance included e.g. battery or tyre replacement and servicing.

What if I want to own the car afterward?

If you eventually want to own the car, you might consider a finance lease. This means the car is yours after the rental period, but you’ll have to pay a ‘balloon payment’ – a final, larger payment due to interest accrued.

Is leasing a car worth it?

Car leasing isn’t for everyone. There are, of course, many terms and conditions, including mileage limits and credit checks. Some motorists might prefer to buy a car outright and not have to commit to monthly payments.

However, leasing is a hugely valuable alternative, particularly in the long term. When you consider road tax (which you don’t have to pay with personal leasing), VAT, servicing and repairs, the costs soon add up. What’s more, you’ll likely enter into a payment contract anyway, or you’ll have to pay a large upfront sum to own the car.

Most importantly, owned cars depreciate. This means they decrease in value over time – in fact, they lose 40 per cent of their value as soon as they leave the lot. You’ll seldom (if ever) make money back if you sell a second-hand car. With leasing, you’re guaranteed the newest model every three to four years – and the biggest payment is the deposit.

Are you ready to lease a car?

Like any financial decision, you’ll need to ask yourself a few questions. Consider:

Are you prepared for the car leasing process?

Your broker will run through credit checks as part of the car leasing process. You’ll need records of employment, your address, and income/outgoings.

Can you commit financially?

If you have any evidence of missed payments in the past, this may limit your options. CCJs and IVAs are not appealing to most lenders, though there are options for those with bad credit.

Are you better off buying?

Not everybody wants a shiny new vehicle. If you don’t mind paying for repairs yourself, or suffering the costs of depreciation, it might be easier to buy outright – particularly if you fail credit checks. However, in almost all cases, it’s better to lease than buy. It’s safer, cleaner and more reliable, plus it could save you money.

Do you understand the limitations?

Make sure you read the small print before you commit, for example, tax relief on business versus combined use, and the mileage limits. You don’t want to be caught out by fees for going over on mileage allowances.

What is included with a car lease?

Now that you’ve answered those all-important questions, it’s time to understand the deal you’ll get. When you agree a leasing contract, you’ll get:

A brand-new car

Enjoy the benefits of comfortable driving, reliable parts and fancy new gadgets – without the price tag. All you have to do is put down your deposit and then agree monthly payments, depending on the length of your terms.

A full manufacturer’s warranty

Assuming your contract is three years or fewer, you’ll get a warranty on parts, and you won’t need to worry about booking an MOT.

Maintenance

You can negotiate maintenance packages with your broker. Most offer reasonable repairs such as cosmetic damage, as well as replacement tyres and batteries. Some packages may also include roadside assistance and servicing, but always ask if you’re not sure.

Road tax

Personal leases come with road tax included. This is usually very cheap on lower emission vehicles.

Can I lease a car without a deposit?

No-deposit options are available with some brokers, though these are not usually worth the cost, as your monthly payments will be considerably higher. If you’re planning to own the car outright, such as with a Personal Contract Purchase, you can do this without a deposit. Remember, your balloon payment could be much higher.

Is car leasing available with insurance?

As standard, car leasing does not come with insurance. This is due to many factors, including your personal driving history, age and mileage. However, some brokers offer insurance, for example third party insurance on personal contract hire, as a bolt-on. This may be more expensive, so it’s worth shopping around to see if you can insure the car more cheaply.

Does car leasing include fuel?

Fuel payments are not included in standard car leasing deals. However, your employer may offer you a fuel card, or you may be able to take out fuel schemes with certain providers. Again, it is up to you if you think it’s worth it, for example mileage allowances.

What happens when I need to return the car?

When your contract is up, you simply return the car to the broker with the keys. Of course, the vehicle needs to be topped up with fuel, and it needs to be in the same condition as when you leased it.

Note that this does not include cosmetic damage. All reputable brokers adhere to the BVRLA ‘Fair Wear and Tear’ guide, so minor things like scratches from road chippings or mildly worn tyres are not an issue.

Your broker will inspect the car, and if there is anything beyond minor damage, you will be charged. You can dispute this, but more often than not, this can be covered by your insurer.

Car leasing: what to know before you sign on the dotted line

Before you approach your broker, keep the following in mind:

It is your responsibility to meet the monthly payments.

If you can’t commit, don’t do it, or choose a cheaper car. The broker is within their rights to repossess the car, and you will also be liable to pay the balance, wear and tear, and admin costs.

You must insure the car.

This includes adding any additional drivers. Ensure they can drive legally and that your broker has agreed to this.

Mileage is limited.

Just like lease terms, you can negotiate mileage with your broker, but keep in mind that if you go over it, you may be liable to pay a significant sum – calculated at an eye-watering pence per mile!

You need to choose the right maintenance deal.

These are negotiable and you’ll need to consider your mileage, plus any other factors such as regular driving in areas with poorly maintained roads. Ask your broker if you’re not sure.

Find the best car leasing deal today

Ready to get started? Contact us to discuss your contract.