If you are looking for a vehicle and you want to pay a fixed monthly cost that is lower than if you were to get a credit agreement or a hire purchase, then you might be considering leasing. Leasing is essentially where you have a car for a period of time while paying a monthly rate. Once that time is up then you hand the car back. You have to keep it in good condition and stick to a pre-agreed mileage (although this can be extended).
Leasing is popular with those who like the idea of a brand new car every few years and those who don’t want to be tied down by owning a car.
However, before you jump right into leasing, there are some things you should know first. In this article, we are going to look at 4 things you need to be aware of before you lease a vehicle.
4 things you need to know about leasing
How are the lease costs calculated?
A typical lease lasts for two to three years. Very broadly, the amount you pay under the vehicle lease is based upon expected depreciation. The depreciation is how much the car loses its value by over the course of the lease. There are a few things that affect depreciation;
- Mileage is a huge factor when it comes to depreciation. The more miles the car has done the lower the value
- Condition of the car
- The number of owners
- Service history
Comparatively speaking, cars that tend to hold their value are the ones that represent the best deal when it comes to leasing. This is because when you lease a car you pay for depreciation – how much value the car loses. Therefore, the lower the depreciation the better the lease deal. Which is why cars that depreciate slowly are better to lease.
However, that isn’t the only thing that impacts how the cost of a lease price is calculated. Generally, the cost of a Contract Hire is calculated as follows;
(purchase price – estimated residual value)/months on contract and annual mileage + admin fee = monthly payments.
How can I lower my lease price?
There are a few things that you can do to lower your lease price, such as;
- Getting a longer contract
- Though this isn’t always the case as the longer the contract the more the car depreciates
- Put more down as a deposit
- Lower your mileage
- Be slightly more flexible
- There are some great deals out there if you are happy to alter a few of your preferences
Are there any up-front payments when leasing a car?
When you lease a car you will have to pay something upfront. Many people refer to this as a deposit but it’s not technically a deposit because you don’t get it back at the end. Instead, it’s more of an initial payment.
You put down an initial payment for two reasons; to lower the monthly payments and to show strength in your finance proposal to the bank. This eliminates the risk.
If you put down more as your initial payment then your monthly payments will be lower. Alternatively, you can put down less as your initial payment and your monthly payments will be higher. However, regardless of what you pay the payment profile of your lease will not change. There might be a tiny difference in regards to interest, but this is a minute difference.
Usually, how much you put down initially is down to you. You will discuss your budget with your vehicle specialist and then you will come to an amount together. However, there might be one or two exceptions. The finance house might request that you put down a certain amount. This could be if you have a weaker credit score or it might simply be their policy that you have to put down a certain amount.
Do I have to have a fixed mileage?
When you lease a car, you will have to agree to a mileage. You cannot go over this mileage, otherwise you will be subject to an excess mileage charge. This varies from manufacturer to manufacturer.
Because depreciation depends so heavily on the number of miles a car has done, the mileage allowance is a key feature of the leasing agreement. The allowance is generally between 10,000 and 50,000 miles per year. It is worth giving careful thought to your likely mileage before you choose your lease option. If you go over your allowance, then you will be liable for extra charges. However, it is worth working out how much these extra charges will be, as sometimes it is worth paying the excess mileage charge for a couple of hundred miles rather than paying more for another thousand miles.
How much is the excess mileage charge?
The excess mileage charge varies between manufacturers. It can range from 6p+VAT /per mile to £1+VAT/per mile. You will pay it at the end of the contract when you hand the car back. It’s always a good idea to ask how much the excess mileage charge is at the start of your contract so you are aware of it.
Can I increase my mileage?
If you are finding that you are doing more miles than you originally thought or you are pretty sure you’re going to go over your mileage early on in the contract, then you might want to increase your mileage.
You can increase your mileage, but you cannot decrease it. This means that if you opt for a higher mileage initially then you could end up paying more than you needed to. Therefore, we always recommend you go for a lower mileage as you can always increase it. The cost of your monthly payments will change but you will be able to increase your mileage.
However, we always recommend talking to your leasing broker before you do this. Sometimes it is cheaper for you to pay the excess mileage charge at the end of the contract than it is to increase your mileage and pay more monthly. So we always recommend chatting to someone about this to weigh up your options.
What happens at the end of the contract?
You may also be wondering what happens at the end of your lease contract. It depends what contract you have, but as we are focusing on leasing, then here is what happens at the end of a Contract Hire.
You will have to arrange for the collection of your vehicle. You either ring the finance house or they will ring you, but you should check to see who is responsible for doing this. Otherwise, you will continue to have the car and rack up the mileage and wear and tear and still be paying for it.
The car will then have to be inspected for damage. There is leeway, and this is called Fair Wear and Tear. This is the little damages that happen when someone drives a car. These could include small scuffs here and there.
However, there are guidelines to which you have to adhere to when you have the car. These are provided by the BVRLA and are the industry standard across the leasing sector. You should be given a BVRLA Fair Wear and Tear Guide when you lease your car. This will tell you what is considered fair wear and tear and what is not. You should make sure that your car sits within these guidelines.
What happens if I have damaged my lease car?
If there is damage then we recommend you get it fixed. If you think that it falls outside of wear and tear then you should get it fixed as soon as you can.
If you return the vehicle to the finance house and it needs repairing then you will simply be sent an invoice which you will have to pay. The problem with this is that the finance house won’t look for the best repair deal, they will simply do it at their convenience with no regard to price. So you could end up paying much more than you would if you had done it yourself.
Can I buy my lease car?
This is a tricky one. Sometimes, people get attached to their lease cars and they don’t want to part with them so want to see if they can buy them.
Most finance houses will be happy to give you a purchase price for your lease car. You will have to then find a third party to buy your car. Whether they buy it for you or then sell you the vehicle is down to you.
However, it should be noted that it does come with risks, especially if you are on a Business Contract Hire. This is because you can claim the VAT back on a Business Contract Hire. However, if you then own the car, you do have to pay VAT. It’s cheeky, we’re not going to lie, but we’ve never had a time when the HMRC aren’t happy with it, but you can’t guarantee they will always tolerate it. Therefore, it does come with its risks.
We also should make you aware that not all finance houses will offer a purchase price. So buying your lease car may not always be possible.
Hopefully, this has cleared a few things up about leasing a vehicle. If you are looking at different finance options then we also have information on Hire Purchase and Contract Purchase. These are slightly more flexible and cater to those who might want to own their car at the end of the contract. However, this article should have given you some advice as to what is involved with a lease contract and some things that you should be aware of. We advise people on this every day, so if you have any questions then please do not hesitate to contact us.
Latest posts by Holly Martin (see all)
- Personal Contract Purchase vs. Personal Contract Hire - 21st January 2020
- A list of the best electric vans available in the UK - 4th September 2018
- Should you lease your next car? - 30th July 2018