Car Leasing for Dummies

You’re thinking about getting a new car, and maybe you’ve seen the term ‘leasing’ thrown about.

What is leasing? How does it differ from buying? Why do some people think it’s amazing and others think it’s the worst idea ever?

Leasing may seem complicated at first, and it can be pretty daunting trying to get your head around it. However, it’s really not as complex as it seems.

In this article, I’m going to tell you everything you need to know about leasing so by the time you finish reading, you’ll be an expert.

Leasing vs. Buying; what’s the difference?

First things first, how is leasing a car different to buying one?

Leasing is essentially where you rent a car for a certain period of time. But, it’s different to daily/weekly rental, which you would do through the likes of Hertz, for example. When you lease you have the car for around 2-5 years. You pay a series of monthly payments for that period of time. When the time is up, you hand the car back. Buying, of course, is very different. If you’re buying a car brand new then you will probably do it via hire purchase. This is where you pay for the car in monthly instalments. Once you’ve finished paying those instalments, you own the car and are free to do whatever you want with it. You can find out more about hire purchase here.

So leasing; you hand back. Buying; you own, either at the end of your finance agreement or, in the case of a cash purchase, straight away (you can read more about cash purchase here). See, told you it wasn’t as complicated as it seemed.

What are the different lease options?

We’ve established what leasing is, what types of lease can you get?

Personal and business contract hire are pretty similar, but as you can probably guess, one is for businesses and one is for private individuals. With contract hire, you pay monthly payments for a period of time and then you simply hand the car back at the end. It is the most common form of leasing and when people are talking about leasing, they tend to be talking about either business or personal contract hire. For more information on contract hire, you can download our guide. Finance lease is slightly different. It’s for businesses, and the difference comes at the end of the contract where you are faced with three options;

  • Hand the car back
  • Sell the car on and use the equity to pay off the final, slightly larger, payment
  • Continue to use the vehicle, paying the same monthly.

Obviously, this is a very basic description of the finance lease so for more information you can download our finance lease guide.

Operating lease isn’t very common anymore, and only Mercedes tend to offer them. It’s the same as contract hire and is for businesses. The main difference is that you are responsible for taxing the vehicle after a year on an operating lease.

Personal vs. Business leasing

I mentioned that there are different lease contracts for private individuals and businesses so you may be wondering why these are different.

To lease through a business you must be;

  • A Sole Trader
  • A limited company
  • A partnership
  • A VAT-registered business
  • An LLP
  • A PLC
  • A charity
  • Local authority
  • Central government
  • An embassy

There are benefits to business leasing that aren’t available to private individuals. These include tax benefits and the lease being “off-balance sheet”. While these don’t apply to all business lease agreements, they are exclusive to business customers. You can read more about the business benefits of leasing here.

However, this doesn’t mean that you should simply write off personal leasing. While there are business benefits to leasing, you may have to pay for company car tax. You can read about company car tax here. Also, if the car is used privately, then you do not enjoy the tax benefits (you can still offset the cost against profits, though).

Personal leasing, on the other hand, means you don’t have to worry about company car tax. This means that while business contract hire may at times seem cheaper or more beneficial, the lack of company car tax will mean that there’s not much difference between the two.

You can read more about business contract hire vs. personal contract hire here.

Dealership vs. Vehicle broker

When you get a new car, regardless of whether you are leasing or buying, you can go through either a  broker or a dealership.

Going to a dealership is the traditional way to get a new car and is a pretty straightforward process. You go to a dealership that sells the brand of your choice, you choose a car and then they offer you a deal. Going through a dealership is great because you can see the cars, you get a retail discount and the chances are you can drive away with your car that same day.

However, it’s only great if you are 100% sure that you want to go through that specific brand. And, your salesperson won’t be able to give you an honest, unbiased opinion. A broker, or vehicle supplier or vehicle broker, on the other hand, is slightly different. A vehicle broker is essentially the middleman between you, the dealership and a finance house.

You go to a vehicle broker with your requirements; they then do the shopping for you. You aren’t tied to one brand, and they tend to have access to discounts dealerships cannot.

Brokers can also access cars across the country, so if there isn’t your car of choice at your local dealership, this won’t be an issue. However, there are some vehicle brokers that work out of their bedrooms (we call them bedroom brokers). While there is nothing particularly wrong with these ‘bedroom brokers’, they will not have the resources to ensure that you get the service you deserve. Of course, this can be avoided as long as you ensure that they are reputable. You can find out more about how to choose the right vehicle broker for you here.

We have only touched upon the differences between dealerships and brokers, but you can find out more here.

Why is leasing a good idea?

Leasing can invoke some strong emotions in people. Some will never buy a car again, others would never even dream of leasing.

It has its strengths and weaknesses, just like everything else, which is what this section of the article is dedicated to.

Here are just some of the reasons leasing could be a good idea;

  • You get a new car every few years
    • The biggest advantage of leasing is that you get to drive the latest models every few years. What more could you want?
  • There’s no worry of depreciation
    • Because you are handing the car back, you don’t have to worry about the car losing value.
  • You can get a better car for the same, or less, money
    • Lease prices tend to be cheaper with manufacturers like Mercedes, Audi and BMW.
  • There’s less maintenance
    • Usually, your car will be covered by warranty for the duration of your contract so you won’t have to worry about additional repair costs.

So, there are some pretty big advantages to leasing a car.

Why is leasing a bad idea?

Leasing does have its weaknesses, and it’s not for everyone. As a car leasing company, we know this, and we feel it’s important you do too.

Some of the disadvantages of leasing a car could be;

  • You don’t own the car
    • This is pretty subjective. Some people will think this is a disadvantage and others won’t. However, if you’re pretty set on owning your car, then leasing isn’t the right choice for you.
  • There are mileage and condition restrictions
    • When you lease a car, you agree to stay within a pre-agreed mileage. If you go over this mileage then you will incur excess mileage charges. You can read about excess mileage charges here.
    • You also have to keep it in good condition. When you hand your car back it will undergo an inspection, with the finance house using the BVRLA Fair Wear and Tear Guide as a reference. If they don’t think the car has been kept within this standard, they will invoice you for the cost of the repair.
  • They aren’t designed to be settled early.
    • Lease contracts aren’t designed to finish early, and there can be cost implications if you do so. So, if you think that your circumstances are going to change then leasing probably isn’t right for you.

There we have it, the leasing guide for dummies. Hopefully, this has given you an overview of all aspects of leasing and has become more informed to make the right decision for you.

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