The benefits of car leasing
Car leasing, or contract hire as it is sometimes known, has always been an extremely popular way of driving a car around the world, and in the United States around one in four cars is leased. Car leasing has also become increasingly popular in the UK yet many drivers who could benefit from leasing their car are still taking out car loans, hire purchase or Personal Contract Purchase (PCP) agreements to acquire their vehicle.
“If it appreciates, buy it. If it depreciates, lease it.” J.Paul Getty, billionaire oil tycoon
The main reason for this reluctance to lease is usually the lack of knowledge of the benefits of leasing and the confusion caused by the terminology that surrounds it.
In the following article we will explain, in easy to understand language, the personal car leasing process and how it may be the ideal choice for you.
An educated driver will always be able to get a better deal
When making any important financial decision it pays to be thoroughly prepared and while most people will invest a significant amount of time and effort when house buying or looking for a good pension product, for many drivers it is deciding which make and model they would like to drive that takes precedent over car finance. While choosing the correct make and model is an important, and usually enjoyable, aspect for drivers, knowing what form of car finance is best value for money for them, given their personal circumstances, can have a significant impact on the costs of driving that new car.
The more information and knowledge that you have on a subject, the more likely you will be to find the best deals and to negotiate better terms of any agreement. The costs associated with personal transport, whether car ownership, public transport season tickets, or car leasing, is often one of the main costs people have to deal with after accommodation, being in a position to accurately estimate the total costs of driving a car will help keep your costs in control.
If you’re considering buying a new car for yourself or your company you are spoilt for choice by the various finance options available. However, one of the most consistently popular choices is contract hire – because it often proves the most cost-effective and the easiest to manage.
So how do contract hire agreements work?
What is contract hire?
Whenever you hear the term ‘car leasing’, chances are that it is referring to contract hire as it is the most common form of vehicle leasing agreement.
Basically contract hire means agreeing to take control of a car for a fixed period – it’s yours to drive but it is never actually yours to own. Instead you reach an agreement with the leasing company to make fixed payments (usually monthly) for the duration of the contractual period. At the end of the contract you return the car to the contract hire company.
Your contract hire payments will be determined by a number of factors. Firstly, there is the retail price of the car – that is the price you would have to pay if you were to buy it outright. Then, there is the residual value of the car – that is its estimated worth at the end of the contract taking into account depreciation, mileage, and condition. You then pay the difference between the two figures in monthly installments. So the higher the residual value of the car, the lower your payments will be.
What are the pros and cons of contract hire?
Many of the advantages and disadvantages of contract hire are a matter of perception – i.e. what’s right for one driver might be wrong for another, and vice-versa.
For example by taking out a contract hire agreement you never take ownership of the car. That may be a problem for some, but an advantage for others who like the idea of being able to return the car and walk away without dealing with selling or trading the car for another one. Some contract hire agreements also include maintenance packages – meaning all you have to worry about is comprehensive car insurance, tyres, and putting fuel in the tank.
Contract hire offers the advantage of fixing many of your motoring costs – you know exactly what you will have to pay and when you have to pay it, helping you to budget. This also makes contract hire popular among VAT-registered companies who can reclaim 50% of the total payments made and 100% of the maintenance package costs. Hire rental tax allowances can also be applied.
On the downside you must return the car at the end of the contract – there is no option to buy as there is with a personal contract purchase (PCP) agreement.
Who is contract hire right for?
Think about your motoring habits before deciding if contract hire is right for you. If you travel a lot, then your mileage will be high which will increase the car’s depreciation and therefore your monthly payments. If you have a flexible job and have to travel varied distances it can also be difficult to estimate your mileage – and if you exceed your mileage limit you’ll face additional charges.
However, if you want to be able to budget with fixed monthly costs, like the idea of not having to sell the car on and want to drive a new vehicle every few years, then contract hire is ideal.
It is also perfect for businesses as it allows them to update fleets regularly with the latest vehicles, avoid large down-payments and adjust fleet size based on staff numbers.
If you think contract hire is the right form of car finance for you, check out the deal listings on our home page.
The benefits of personal car leasing
Before we take a look at the main benefits that car leasing has to offer it is worth bearing in mind the famous quote of billionaire oil tycoon J.Paul Getty – “If it appreciates, buy it. If it depreciates, lease it”. This quote, in a nutshell, encapsulates the main benefit of car leasing. A car is not like a house which usually appreciates in value after purchase, whereas, when you drive away in your brand new car it is already losing value. If you take out a car loan or car finance agreement to purchase a car you are simply paying a set amount a month for something that is losing, not gaining value. In simple terms, you are buying a product which is depreciating in value not only every time you drive it but also when it is sat on your drive. Leasing is a different proposition for drivers, instead of owning the vehicle, the driver is pays a monthly amount to use that vehicle over a set period of time (typically 24 or 36 months). At the end of the agreement the car is taken back by the leasing company.
Let’s take a look at the main benefits of car leasing
- Monthly repayments will be on average between 35% and 55% less costly than the repayments on a car loan. Also, in the majority of lease agreements, only a small deposit is necessary, usually amounting to 3 monthly payments.
- One of the biggest attractions of car leasing is that you are able to drive away in a car that might be out of your price range in terms of purchase price.
- The car manufacturer warranty will normally cover the period of the lease and maintenance costs can be covered. Road tax is also usually included in the lease.
- No huge up-front costs, capital outlay or car loans.
- Fixed price motoring where most costs remain the same for the period of the lease.
- You can drive a brand new car every two to four years and benefit from the safety, fuel economy and performance advancements found on newer models.
What cars are best for leasing?
There are numerous factors in determining a good lease car. Seasonal factors, supply and demand of cars, the wider economy, and a car’s residual value, are just some of the factors to be aware of which can affect the contract hire and leasing market in the UK. All popular makes and models are available in the personal lease market but a good rule of thumb is that the models which depreciate the slowest (i.e. will lose as little value as possible over the term of a lease agreement) will be the most attractive in the market. Historically this has lead German carmakers, such as Volkswagen, Audi, BMW, and Mercedes-Benz to be very popular however any model which retains value will be very competitively priced.
What makes up a lease payment?
A handful of very large leasing companies supply most of the contract hire and leasing market in the UK with cars, these companies purchase hundreds of thousands of cars from the manufacturers each and every year so they can negotiate large discounts. The lease price of a car is made up of the difference between the initial purchase price and the car’s estimated residual value (future value) at the end of the lease agreement, with mileage and condition also taken into account, as well as VAT and a profit element. So, if a car loses less money and has a lower mileage, it's residual value will be higher and therefore will cost less to lease.
Car finance, the main options:
Typical Hire Purchase agreements include a large deposit element, usually between 20% and 50%, with the balance of the car’s price paid over the life of the HP agreement. At the end of the agreement the car is the property of the driver, however the now used car will be worth much less than the original purchase price due to depreciation.
A relatively new car finance option is the Personal Contract Purchase (PCP) deal. Here a car drive can put down a lower initial deposit, in comparison to HP, and pay a lower monthly repayment. At the end of the agreement the driver has several options – hand the car back for free (subject to mileage and condition), pay the final ‘balloon’ payment and take ownership of the car, or take out a new PCP agreement on a new car.
Personal car leasing typically has the lowest deposit of the three main finance types, followed by a fixed set of monthly payments that are directly related to the car’s residual value at the end of the agreement. The larger the residual value, the lower the monthly payment.
These are a few useful terms that have been used above.
Depreciation – this refers to the reduction in the car’s value caused by age, mileage and condition. The depreciation of a vehicle is greatest during its first year. The make and model of the car also has a large bearing on the depreciation value.
Residual Value – this term refers to the predicted value of your car when it reaches the end of the lease agreement. This amount is very important as the monthly repayments will be based on the difference between the selling price and the residual value.