Is car leasing a rip off? | Why do so many people lease their cars?

Is car leasing a rip-off?

If you find yourself asking ‘Is car leasing a rip-off?’ then read on! It’s highly unlikely that car leasing is a rip-off considering leasing accounted for 29% of all new car purchases in the UK in 2015. If it was a rip-off I’m certain that there wouldn’t be such a huge number of people choosing lease finance options to drive a new vehicle. Do you still need convincing? This article has all the information you need.

Why do people choose to lease a car?

There are several reasons people choose to lease a car over buying one. One of these is cash flow. Buying a new car on finance will cost considerably more per month than leasing. A new car purchase loan will be more costly than a lease car each month because you are buying the vehicle. On a lease agreement, you are essentially just paying for the depreciation on the car while you are using it. So the monthly payments will be much lower and more manageable for a lease.

Another reason people choose a lease vehicle is the downpayment is much lower than the deposit on a new car. A lease car downpayment equates to approximately 3 monthly payments up front. You can expect to pay approximately 10% of the total cost of the car if you plan to purchase a new car on finance. So if available cash is not readily available then a lease is a great way to be able to drive a new car without the price tag.

The flexibility of a lease means you can drive a brand new car every 3 years. If you want the latest car or you think your requirements for a car may change then leasing is the perfect solution.

With so many lease options available there is something to suit everyone. For many, leasing is the only means that offers them the ability to drive a new car. Explore the different lease types.

Why do business owners lease cars?

Business owners see additional benefits from leasing opposed to buying a vehicle in the form of tax relief. Even if the mileage allowance is exceeded on a business lease, 50% of the VAT can be reclaimed. Also, a portion of the depreciation of the car can be fixed against your tax bill. Depreciation is calculated and included in your monthly payments so a portion of your monthly fee can be reclaimed against your tax bill.

What is the price difference between leasing and buying on finance?

The price difference between leasing and buying is significant. The monthly repayments can be up to £200 cheaper for a lease. Again, this is because you are not going to own the car at the end of the agreement, you will simply hand it back and get a new lease.

Example figures:

A diesel 4 door Mercedes C-Class Sport Saloon: To lease the vehicle you’d pay a £230.00 arrangement fee. The initial payment would be £2,293. Then monthly payments of £254.00 for 23 months. You’ll have a mileage allowance of 10,000 miles per year. At the end of the two-year lease, the vehicle would have cost £8,383. This figure excludes car insurance, fuel and maintenance of the vehicle.

To purchase the vehicle you’d stand to pay around £28,700 new. The AA give the average depreciation across all makes and models to be around 20% per annum. In the first year, however, a car can loose up to 40% of its value. For the purpose of calculation, we’ll assume the car depreciates by 20% per annum. Owning the car would cost £11,480 after two years.

That’s a difference of over £3000 over the period. In this example, leasing offers better value for money.

So is it cheaper to lease a car?

The answer is, it can be. At the end of a car purchase you own the car but at the end of a lease you typically hand it back to the lease company (unless you choose contract purchase where you have the option to buy the car at the end of your lease). The calculation when working out whether leasing is cheaper is all about depreciation. If after 3 years the depreciation on a vehicle is high then you would be better off leasing it and hand it back than purchasing it.

Which? looked at some specific car models and found that a VW Scirocco was worth 63% of its original price after three years. Versus a new Ford Mondeo which was typically worth just 36% of its initial value. Because of that, the survey suggested that most people would be better off buying the VW Scirocco on finance, but leasing a Mondeo.

How can I work out if my vehicle choice would be cheaper to lease?

The monthly payments and initial payment will be cheaper if you opt to lease the car. To work out if it’s better value to lease your chosen new car you’ll need to do a bit of background research.

1. Compare the total amount payable on your lease and purchased finance option.
2. Check second-hand car websites for the re-sale price of your car.
3. Work out the depreciation on the car by taking the total amount payable for the purchase finance option and dividing it by the re-sale value. Then x100 to get the percentage depreciation.
4. Deduct this percentage from the total amount payable and if the remaining amount is higher than the lease price over the same period then you’d be financially better off leasing.

Are there any times when leasing isn’t the best option?

If you want to own a car then leasing probably isn’t the best option for you. The only lease which might suit your needs is a PCP lease (personal contract purchase) or HP (Hire Purchase). This enables you to hire the vehicle with an option to purchase it for a balloon payment at the end of the lease term. This is great for anyone who isn’t sure the car is right for them and wants an extended opportunity to check it fits within their lifestyle. Or if your finances are limited now but you’re expecting to have higher income towards the end of the lease period. Or if you would simply like the flexibility of leasing with an option to purchase at the end.

I hope this has given you some good insight into why car leasing is increasing in popularity and helped you decide whether leasing a car is the best option for you. If you have more questions you can visit our Learning Centre.