What Is Car Leasing?

What do you actually pay for when you lease a car?

A lease payment is mainly based on how much value the car is expected to lose during your contract, plus finance and admin costs. You are covering the depreciation over your term rather than paying off the full value of the car. That is one reason lease payments can look lower than some other finance on the same car.

A standard UK personal lease usually includes:

• an initial payment, often expressed as a number of monthly payments
• fixed monthly payments
• a set contract length, often 24, 36 or 48 months
• a yearly mileage allowance
• the return of the car at the end

Road tax is usually included for the length of the contract, but check the agreement in case there are exceptions. Some deals also let you add maintenance, so servicing, tyres and routine repairs are covered by one monthly figure.

Lower monthly cost does not always mean lower total cost, so it helps to compare the full cost.

How does car leasing work in practice?

First, you pick a car and a contract. You then choose your annual mileage and how much to pay upfront. A higher initial payment brings the monthly figure down, but it does not make the deal cheaper overall: it mainly changes when you pay, not how much.

Once the car is delivered, you make your monthly payments and keep to the contract terms:

• stay within the mileage allowance where possible
• keep the car in good condition
• make payments on time
• arrange servicing if it is not included

At the end of the lease, the car is inspected and collected. If you have gone over your mileage, or there is damage beyond fair wear and tear, extra charges may apply. What happens at the end of a car lease explains the hand-back in detail.

Do you own the car at the end?

No. That is one of the biggest differences between leasing and PCP or hire purchase. A personal lease is a hire agreement, not a route to ownership, and there is normally no option to buy the car as part of the deal.

That does not make leasing bad value. It suits a different goal: driving a newer car with fixed monthly costs and handing it back later, without the work or risk of selling it.

Can you end a lease early?

Usually only at a cost. The voluntary termination right in section 99 of the Consumer Credit Act 1974, which lets you hand back a PCP or hire-purchase car once half the total price has been paid, does not apply to hire agreements such as a personal lease. Ending a lease early normally means paying an early termination charge set by the contract, which can be a large share of the remaining payments.

If you think your circumstances might change during the term, a shorter contract or a finance product with more flexibility may suit you better.

What are the main pros of leasing?

Leasing can work well if you:

• want fixed monthly payments
• like changing cars every few years
• drive a predictable number of miles
• want to avoid selling the car later
• are happy not owning it
• like driving a car that is usually still under the manufacturer's warranty

For many drivers the appeal is certainty: you know roughly what the car costs each month, and you do not carry the resale risk at the end.

What are the main downsides?

Leasing is not automatically the cheapest route. Possible drawbacks include:

• you do not own the car
• excess mileage charges
• charges for damage beyond fair wear and tear
• expensive early termination
• insurance is usually your responsibility
• the monthly payment is only part of the real cost

Insurance, fuel or charging, and maintenance where it is not included still count. A deal that looks cheap on its own can look different once the full monthly cost is added up.

What about business leasing?

Business leasing can have VAT advantages that personal leasing does not. HMRC's rule is that a VAT-registered business leasing a car normally cannot reclaim 50% of the VAT on the lease rentals, to cover private use, but can reclaim the other 50% under the normal rules. HMRC lists limited cases where all of it can be reclaimed, such as cars used mainly for driving instruction or for hire with a driver.

Leasing can also help cash flow, because it spreads the cost rather than tying up capital. Get advice from an accountant on your own position.

When does leasing make sense?

Leasing tends to make most sense when:

• you want a car for two to four years
• you know your annual mileage fairly well
• you value fixed monthly budgeting
• you do not need to own the car
• you want to avoid the uncertainty of selling a used car later

If you drive very high mileage, want to modify the car, or might need to end the contract early, leasing may be less suitable. To compare it with PCP using your own figures, try the Lease vs PCP Calculator.

The bottom line

Car leasing is paying to use a car for a fixed period rather than paying to own it. It can be a good option if you want predictable monthly motoring, a new car and a simple hand-back at the end. It works best when you understand the contract, compare the full cost, check what is included, and choose a mileage allowance that reflects how you really drive.