Car leasing explained
Car leasing explained
Despite car ownership being at an all-time high, car leasing is still a popular alternative. From accessing the latest models and having relatively low monthly payments to avoiding the hassle of car ownership, car leasing has several advantages.
In this guide, we’ll cover how car leasing works, its benefits and drawbacks, and take a look at more flexible alternatives to leasing, such as car subscription.
What is a car lease?
‘Car lease’ is an umbrella term used to describe the many ways to lease a vehicle. It can be used for both business and personal leasing and is most commonly used when referring to PCH (Personal Contract Hire). In this scenario, put simply, a car lease (or PCH) is a financial agreement in which you pay to use a car for a predetermined period of time, typically two to four years, but sometimes shorter or longer. You don't own the car, and at the end of the lease, you return it to the provider.
A Personal Contract Purchase (PCP) agreement is also a way of leasing. However, you have the option to purchase the car at the end of the contract.
How does a car lease work?
When you lease a car, you'll make a series of regular monthly payments over the course of the agreement. The amount you pay will depend on the car you choose and the length of the lease. You'll also need to make an initial payment that's typically equivalent to the first few months of lease payments. The larger the initial payment, the lower your subsequent monthly payments will be.
When looking at lease deals, you'll often see them described as ‘3 + 23’ or ‘6 + 35’ which refers to the size of the initial payment and the number of subsequent monthly payments. The initial payment is used to cover part of the overall cost of the lease, and you won't get it back when the agreement ends.
You'll need to stay within the agreed mileage limits and make sure you have your own insurance policy. Some lease providers offer a servicing package at an additional cost. Most lease cars are close to brand new, so you won't have to worry about an MOT unless you keep the car for more than three years.
At the end of the lease, you can return the car to the lender and either walk away or put down another upfront payment and start a new lease.
What do I need to lease a car?
To lease a car, you'll typically need to meet the following requirements:
- Credit and income: Most car leasing companies will require you to have a good credit score and a steady income. You'll typically need to provide proof of income (payslips or tax returns) and your credit history.
- Driver's licence: You'll need a valid driver's licence to lease a car.
- Clean driving record: Most car leasing companies will require you to have a clean driving record, with less than 6 penalty points, and no major traffic violations or accidents.
- Upfront payment: Most car leases require an upfront payment, also known as a deposit. This payment is typically the equivalent of a few months in lease payments.
- Insurance: You'll need to have insurance coverage for the car you're leasing. Most leases require you to carry a certain level of insurance coverage to protect against damage to the car.
- Personal identification: You'll need to provide personal identification, such as a driver's licence or passport, to lease a car.
It's important to carefully review the specific requirements of the leasing company you're considering and make sure you meet all the necessary criteria before entering into a lease agreement.
Benefits of leasing a car
- Lower upfront costs: One of the main benefits of car leasing is that it requires a lower upfront investment compared to purchasing a car outright. This can be especially appealing for people who don't have a large amount of cash available for a down payment.
- Lower monthly payments: Because you're only paying for the use of the car and not the entire purchase price, monthly lease payments are typically lower than loan payments for a financed car.
- Ability to drive a newer car: Leasing a car allows you to drive a newer model with the latest features and technology, without having to pay the full purchase price upfront.
- Flexibility: At the end of the lease term, you have the option to return the car and choose a new one, rather than being stuck with the same vehicle for a long period of time.
- Potential tax benefits: Depending on your situation, you may be able to claim some tax deductions on your leased car.
- No need to worry about selling the car: When you own a car, you'll eventually need to sell it or trade it in. With a lease, you don't have to worry about this, as you'll simply return the car to the lender at the end of the lease term.
Drawbacks of car leasing
- Higher overall costs: While monthly lease payments may be relatively low, the cost of running the car is often the most expensive. Paying for servicing and maintenance can become very costly, especially if you’ve chosen to lease the vehicle long-term. One study found that 19% of car users have taken out debt to pay for servicing costs.
- Limited mileage: Most car leases come with mileage limits, and you'll be charged a fee if you exceed the limit. This can be inconvenient if you need to drive a lot for work or personal reasons.
- Lack of ownership: When you lease a car, you don't actually own it, so you won't have the same level of control over the vehicle as you would if you purchased it.
- Potential extra charges: You need to ensure that the car is in good condition when handing it back as you may be charged fees if the car is returned in poor condition.
- Limited customisation: You may not be able to make modifications to a leased car, as you'll need to return it in the same condition as when you received it.
- In the current economic climate, it can be very difficult to manage leasing costs and then get out of them, as most agreements are largely inflexible, locking customers in for between 2-4 years. If you do opt to cancel early, you’re also looking at:
- Early termination fees: If you need to end your lease early, you may be charged a hefty fee.
Alternatives to car leasing
- Purchasing a car outright: One option is to save up and purchase a car outright. This allows you to own the car and have complete control over it, but it requires a larger upfront investment and may have higher monthly loan payments.
- Hire purchase (HP): With an HP agreement, you make regular payments to a lender and eventually own the car once all the payments have been made. This can be a good option if you want to own the car and have more control over it, but it may have higher monthly payments than a lease.
- Renting a car: Another option is to rent a car on a short-term basis, which can be a good choice if you only need a car for a few days or weeks. This option can be more expensive on a monthly basis than a lease, but it provides more flexibility and doesn't require a long-term commitment.
- Car subscription: A car subscription allows you to pay a fixed monthly fee to use a car on an ongoing basis, without lengthy contracts. It is similar to a car lease, but typically offers more flexibility, a wider range of options, and all insurance, tax breakdown cover, and servicing costs.
With a car subscription, you can choose from a variety of vehicles and the subscription term is a rolling monthly contract, meaning that when you want to stop paying, you do - no fuss. You also have the option to swap vehicles or cancel altogether without any additional fees or hidden costs. Plus, it allows you to try out a vehicle before you purchase it to see if it is the right fit for you.
Car subscriptions can be a good option for people who want the convenience and flexibility of having a car without the long-term commitment of a lease, loan or ownership.
Car leasing vs car subscription
Car leasing and car subscriptions are similar in that they both allow you to rent a vehicle for a fixed monthly payment. However, there are some key differences which make car subscription the better option for many people:
- Flexibility: Life can sometimes be unpredictable, and a car subscription offers more flexibility than car leases. You can try out a new car before you decide to buy or you can try several different types of vehicle over the course of several months to see what's right for you. Alternatively, when you’ve finished with the vehicle, simply cancel the subscription and relax knowing there are no hidden fees.
- Value: Car subscriptions include maintenance and repair services as part of the monthly fee, as well as tax, insurance and breakdown cover. The combined savings can make car subscriptions better value versus leasing.
- Ease: Car subscriptions are built for simplicity and offer everything you need to get on the road in one easy monthly payment. Your vehicle can be ordered online and delivered to your door within 7 days.
- Freedom: Car subscriptions don't require a long-term commitment, so you have the option to cancel or switch to a different vehicle when you need. Plus there are no unforeseen costs or extra bills to pay, giving you peace of mind and giving you the freedom to focus on what really matters to you.
Get your car subscription with Drive Fuze
A car subscription with us is all-inclusive. It means your tax, insurance, servicing, maintenance and breakdown costs are all covered in your fixed monthly payment. For you, there’s peace of mind that you won’t face hidden costs or an unexpected rise in your bills. Subscription is just one easy monthly payment with no long term commitment - giving you complete freedom and flexibility.
To find out more, take a look at our range of cars and sign up for your car subscription today.