How are car lease payments determined?

We look at how the cost of each lease option is determined, and what impacts lease price...

When you are researching lease deals, you are undoubtedly looking at the price. And this is understandable, price is hugely important when looking at lease deals, and is often the most important thing people look for when choosing which lease deal to go for.

On the surface, some lease deals look the same but they are vastly different in price. This can often be confusing, and it begs the question; how are car lease payments determined?

The chances are, the lease deals are actually different but don’t look different at first glance. At OSV, we pride ourselves on our transparency and think that it is only fair that you know how car lease prices are calculated.

In this article, we are going to look at how car lease payments are determined, and what affects lease prices.

How is the cost of a Contract Hire determined?

Contract Hire, or Business Contract Hire, is one of the most common lease agreements and is often what people are talking about when they are talking about leasing. You have a car for a set period of time while making monthly payments. Once that time is up, you hand the car back with nothing more to pay (subject to mileage and condition restrictions). You can read more about Contract Hire here or watch the video below. 

The cost of a Contract Hire is determined by the residual value, purchase price, the length of the contract and the annual mileage.

What is the residual value?

The residual value is the amount you can buy the car for at the end of a lease – if you decide you want to purchase the car.

What is the purchase price?

The purchase price is how much the car has been bought for, including discounts that have been put on the car by the dealership.

The general calculation is as follows;

(Purchase price – deposit (or first rental) + interest) – estimated residual value/number of monthly payments

A general rule is that the smaller the gap between the purchase price and the residual value, the lower the monthly payments. However, you can see that this can be difficult to work out, so it is advisable to contact an experienced broker who will be able to break down the cost for you.

Learn more about what affects depreication here

How is the cost of Finance Lease determined?

Finance Lease is perfect for those who are going to be doing high mileage or those who don’t want condition restrictions on their vehicle. It’s also great for VAT registered companies. Read more about Finance Lease here or watch the video below. 

There are a few things that determine the cost of a Finance Lease including the cost of the vehicle overall, the length of the contract and the cost of the balloon payment at the end of the contract.

It should be noted that the cost of the balloon payment isn’t necessarily how much the vehicle is going to be worth at the end of the contract. Instead, it is a suggestion of a final payment. This is because there are no mileage or condition restrictions on a Finance Lease and therefore it is near impossible to determine how much the vehicle is going to be worth at the end.

The balloon payment is set by you and depends on how much you want to put down and how much you want your monthly payments to be. The more you put down as a final balloon payment, the lower your monthly payments. However, the lower the final payment, the higher the monthlies. It’s entirely up to you how much you put down, and for that reason we can’t give specific numbers or calculations because it depends on how well you look after the vehicle and what it is.

So that’s how car lease payments are determined.

What affects the price of a lease payment?

Although each scheme has a different calculation for payment, there are some factors that affect all the lease schemes. These include;

  • The length of the contract
    • A common misconception about leasing is that the longer the payments, the lower the monthly payments. However, this is not always the case.
    • Lease payments are determined by depreciation. Therefore, the longer you have the car the more it depreciates and the more the monthly payments will be.
    • This isn’t always the case, however, but it is worth noting that longer doesn’t always mean more affordable.
  • Annual mileage
    • The higher the mileage, the more the car will depreciate. Mileage is one of the biggest factors when determining depreciation, so you will have to think really carefully about your annual mileage.
  • Type of car
    • Some car makes and models depreciate quicker than others. The likes of Mercedes and BMW are popular to lease because they depreciate slower and therefore are more affordable on a lease.
Working out calculations at a desk
  • Choice of supplier
  • Credit rating
    • The better your credit rating, the more likely you are go get low monthly payments. This is because you are less of a risk to the finance house. Likewise, if you have bad credit then you should be prepared to pay more in monthly payments, and possibly put down more initially.  
  • Type of lease scheme
    • Contract Hire is often cheaper than Contract Purchase because you aren’t taking into account the MGFV.
  • Manufacturer targets
    • If dealerships are struggling to meet targets, then they are likely to offer considerably cheaper deals in order to shift units. This means that you could get a much better deal.
  • Residual value
    • As we have mentioned above, the higher the residual value the more affordable your monthly payments will be. This is is because the difference between the residual value and the purchase price will be smaller.
  • Any additional features
    • For example, a sat-nav

Can I negotiate my lease price?

In some circumstances, you can negotiate lease price. The price you will want to negotiate is the selling price of the vehicle. This is because the lower the selling price, the smaller the distance between the purchase price and the residual value. This, in turn, lowers the cost of the monthly payments.

To do this, you will have to do your research and go into the negotiation fully prepared.

Click here to read our top tips on negotiating lease price here

Do lease prices include interest?

There is no interest payable by you if you have a vehicle on a Contract Hire or Private Contract Hire Agreement as it’s technically a long term rental.  

Finance Lease however does attract interest charges which will vary depending on costs of goods, length of the agreement and your credit record.  However, the interest charge will be clearly demonstrated on the finance documents.

In conclusion, each lease scheme and purchase scheme has a different way of calculating price. There are some things that determine some lease contracts and then there are also things that affect pretty much all schemes including the cost of the car and the length of the contract. You can negotiate a lease price but the thing you need to be negotiating is the purchase price. We recommend you read our article on the best way to do this. Lease contracts also do include interest, as it is compensation for the lease company. It is difficult to work out lease prices at home just using a simple calculator. Therefore, if you want a comprehensive breakdown of lease price, then we recommend contacting an experienced broker. They will be able to accurately work out lease prices and help you find the best price for you. Hopefully, though, this article has given you a good idea of how lease prices are determined and what sort of things affect lease price.

Woman ripping price paper
Rachel Richardson
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