Leasing! What Is It Good For?
Ok, although Edwin Starr is not on record saying that, the answer is definitely not “absolutely nothing”.
Leasing a car is widely regarded as the cheapest solution for procuring a brand-new vehicle and you are awarded the ability to update your car every few years.
The primary belief for having access to a new car is still to purchase one outright or to get a loan to finance the car - usually an HP (Hire Purchase) agreement with a dealership. However, car leasing is now dramatically growing in popularity.
The stigma around leasing has been predominantly aimed at its complexity and lack of transparency - however, this is generally associated with an agreement called Personal Contract Purchase (PCP) and is a favourite at dealerships. Personal Contract Purchase tends to have higher initial payments, interest and a final substantial “balloon payment”, which secures your ownership of the car.
However, in the upcoming aftermath of the FCA Motor Finance Review, we expect to see less of the confusing PCP agreement and the rise of the favoured leasing arrangement among brokers, Personal Contract Hire (PCH).
Personal Contract Hire (PCH) gets rid of the final balloon payment, as there is no option to own the car at the end of the lease. Whilst you may feel sad at this notion, a regular car will only ever lose money. The cost of a PCH is pinned on how well a car can hold onto its original value and how much the finance company believe they can sell it for at auction after the years you’ve been using it - i.e. the slower the car loses its value over time, the cheaper your lease will be for that car.
This often manifests as more expensive or higher spec level cars costing less to lease than cheaper versions, purely because it can hold its value better and be more desirable to a second-hand buyer.
Whether you’re using the car for personal use or allocating it to a business, you can take advantage of some tax benefits that you can’t access when owning a car.
We are fully aware that sometimes the terminology used in leasing can be less than engaging. “Payment profiles”, “monthly rentals”, “lead times” and “residual value” aren’t phrases that get the average warm-blooded human fired up. Nevertheless, we are here to explain it all and put you at ease - as it is much simpler than it initially seems.
I’m sure you’ve some more questions around why you should choose to lease your next car rather than buying, so let’s get started with some answers:
Are the monthly rentals expensive?
As mentioned before, it all depends on the car’s ability to hold its value. The finance company buy the car from the dealership, they calculate how much the car will be worth at the end of your lease, the difference of these values then determines your rental amounts. If a car can be sold for 80% of its original value at the end of your lease, then you only need to pay for 20% of the car’s value to use it. Whether it goes for more or less than 80% at the auction is the risk of the finance company, it has no effect on you at all.
Most people nowadays prefer to make monthly payments as its easier to budget for along with other bill payments. It also means that you don’t need a huge lump sum to purchase outright or to have a high-interest unsecured loan show on your credit score.
Am I limited to certain cars?
When you walk into your local dealership, you can choose from anything they have on their forecourt. Some cars will have added options - some functions will be as useful and as easy to understand as an ancient Mayan puzzle box. Some cars will have something you want and something you don’t want and something you want to be on it won’t be. Some dealerships will sell more than one manufacturer, but most will peddle just one. Alternatively, you can order one through them from the factory and pick it up when it’s ready, with the extras you do want.
However, when you speak with a leasing broker, you can have any car you want… I’ll say that again: ANY car!
If it’s sold in the UK market, then you pick it. If you want something that’s in stock for quick delivery, we can browse across the UK dealership network for a car that suits your requirements. If you want the cheapest possible option that works for your lifestyle, then we can use our buying power to negotiate discounts on your behalf.
If you have specific demands for extra equipment, we can add that on too - sometimes lowering the cost of your lease depending on the effect on the residual value. The most common types of optional equipment available for almost all cars are:
- Alloy Wheels
- Communication Aids
- Driver Information Tools
- Driving Aids - incl. parking assistance
- Packs (multiple options added together)
- Styling - external and internal
- Towing attachments
Do I Need To Pay A Large Sum Upfront?
Not always, it is entirely flexible. A Hire Purchase agreement at a dealership will usually require a hefty initial payment - typically 10-15% of the value of the car.
A Personal Contract Purchase agreement will allow a bit more flexibility with your initial payment, but the final payment will usually be 45-55% of the value of the car at a typical interest rate of 4-7% APR.
With Personal Contract Hire, whether you pay a large amount as your first payment or a smaller sum, the cost of your lease does not change.
Some people may have sold an old car and have some extra funds to put down, making their monthly payments lower. Some people don’t a lump sum to use straight away, so would prefer to pay month to month with a slightly higher monthly amount. It depends on your circumstances and what is best suited to you and your monthly budget.
Will the monthly payment amounts change?
*smugly grins* Nope!
Interest rate fluctuations or the changing resale value of the car will have zero impact on your monthly payments. Vehicle tax increases from the annual Government Budget review can incur a separate payment, but this is a rare occurrence and is almost always only a few pounds.
In terms of the financial aspect of your payments; once you’ve signed the contract and it’s been processed by the finance company - that’s it. Your costs are fixed for the duration of the lease. This makes budgeting much easier.
What do I do at the end?
In a word, nothing. Simple, right?
In the build-up to the end of your lease, we will contact you to discuss what you’d like to do next and also to arrange a collection date with you. Then a collection agent will be sent from the finance company (who legally own the car) to assess the condition of the car and drive it away.
That’s it! No need to take hundreds of pictures and advertise it on everyone corner of the internet. No need to meet with endless swarms of time-wasters asking questions about parts of the engineering that neither of you knows anything about. No need to leave a “FOR SALE” sign in the window and pray for the phone to ring.
The car just gets picked up and driven off, hassle-free!
There we go!
Hopefully, this has helped to explain why you should lease your next brand new car, rather than buying or financing.
If you have any further questions about leasing and how it can work for you, contact our Sales Advisors at email@example.com or by clicking the phone icon in the bottom left-hand corner of your screen.