What is car leasing? What are the pros and cons?

Leasing, in addition to traditional cash deals and personal finance packages, is becoming an increasingly popular way to get behind the wheel of a new car. We’ve compiled a detailed guide to explain how it compares to Personal Contract Purchase (PCP) and Hire Purchase (HP) alternatives and to help you decide if it’s right for you.

Like any finance agreement, you should carefully consider whether you can afford each monthly payment before you agree to sign a contract with a dealer. Our new car deals page can help you find your ideal new car for a great price – our network of trusted dealers will offer cash prices, finance deals and leasing options to help you pick the best deal.

What is car leasing?

A lease is an agreement between the customer and the dealer that lets you to drive a brand new car for an agreed length of time in return for an initial deposit and regular monthly payments. At the end of the agreed period the car is still owned by the dealership so you’ll have to return it – if you want to upgrade to a new car, you pay a second deposit and sign a new contract.

How car leasing works

If you want to lease a car, you’ll first have to agree the terms of your contract. This’ll determine the size of the initial deposit and the price of subsequent monthly payments. It will also state how long the leasing period will be, how many miles you’ll be allowed to cover and in what condition it must be when it’s returned. Lease periods are usually between two and four years, although the exact time will differ from dealer to dealer.

The price of the initial deposit and the monthly payments will depend on the car’s purchase price, the leasing period, its predicted depreciation and the number of miles you plan to drive. Unlike Personal Contract Purchase (PCP) agreements, car leases tend to be more affordable if you only plan to keep the car for a short period or to change cars regularly.

One reason for this is that the dealer will sell the car on once it’s returned. If a car is returned after a few years with many miles on the clock, it may prove more difficult to sell than a newer model with lower mileage. The amount they can confidently sell a car for once it’s returned will be reflected in the price of a lease.

What happens when my car lease agreement ends?

Before your term ends, you’ll be contacted  by the leasing company to arrange a day to return the car. Its mileage and condition will be checked to make sure you haven’t covered too many miles and that it hasn’t been damaged beyond fair wear and tear. Providing you return the car in a saleable condition and you haven’t exceeded the agreed mileage, you shouldn’t be liable for any surprise charges.

Some leasing companies will give you the opportunity to buy the car at the end of your agreement. If you’d like to keep the car, you’ll have to make a final payment that equates to the second hand value of the vehicle.

What if I want to change my car before the end of the lease agreement?

Some leases will prevent you from ending the agreement early. Even if you are able to return the car ahead of schedule, you may find you are still required to cover the outstanding monthly payments. The terms of leaving an agreement early should be described in your contract, however.

Like any finance agreement, you should make sure you read the terms of your contract carefully before you sign – you may find that, upon considering your own specific circumstances, other finance options or a traditional cash purchase may be more suitable.

What are the benefits of car leasing?

Leasing a car can allow you to fix the cost of owning a car for the whole length of your contract term. Some dealers will offer to cover the cost of vehicle maintenance and road tax as part of a leasing agreement – this could mean many of your motoring related outgoings are pulled together into a single monthly payment.

Some new car buyers will be concerned by the effects of steep depreciation when the time comes to sell your car. Leasing deals avoid this worry because it’ll be the dealers responsibility to sell the car on, not yours. A relatively short two-year lease with an agreed mileage of 8,000 miles per year could actually cost less than the depreciation on a comparable new car. These figures will vary depending on the specific details of a given lease agreement, however.

What are the downsides of car leasing?

If you’d prefer to own your car outright at the end of a finance term, leasing may not be the best option for you thanks to the comparatively large payment needed. Equally, if you regularly travel long distances or intend to keep the car for a number of years, leasing may prove to be more expensive than other finance options.

If you exceed the agreed mileage or return the car in poor condition, you may be liable for potentially expensive penalty charges. These should be outlined in your contract and may be worth considering before you decide to lease a new car.

As with most forms of personal finance, leasing agreements require you to keep up regular monthly payments for the whole contract term. You should make sure you’re able to meet these payments before you sign.

Car leasing vs PCP and HP finance

PCP and HP agreements will often give you the chance to keep your car for longer in return for a final balloon payment – not all leasing agreements will allow you to do this. If you’re confident you’d like to keep your new car indefinitely, these other types of finance agreement could be a better option.

Want to know more about leasing?

If you’d like to know more, read our carwow finance guide for more details about new-car finance options, including hire purchase (HP) and personal contract purchase (PCP) deals.

Save money on your next new car

View the best carwow deals currently on offer at our new car deals page – you’ll received personalised offers from our network of trusted dealers. If you’re not sure what to buy, our car chooser tool and new car deals pages can help you make a decision.

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