Car Leasing Explained

How do I know if car leasing is right for me?

Are you the type of person who likes to change their car every few years…?

If so, then ask yourself a few simple questions:

  • How much did you spend when buying your last car?
  • How long did you keep the car for?
  • How much did you sell the car for?

To work out roughly how much your last car cost you per month, let’s do some simple arithmetic:

[what you spent] minus [what you sold it for] divided by [number of months you owned it]

Of course, you’ll also need to add the cost of any road tax that you had to buy during the time that you owned the car and work out how much interest you paid out (if you took out a loan), or how much interest you lost (if you took the money from a savings account).

And the costs and inconvenience don’t end there; when you finally sold the car, how long did the process take and much did you spend on advertising. Even worse, if you part-exchanged your car, how much less than the market rate did the dealer offer you.

On balance, when you add everything up – the costs, the hassles, the inconvenience – and you look at what you could have leased for the same money or less, you have to ask yourself: “why on Earth would I ever buy a car again…?”

Still not convinced…? why not read “A typical new car buyer’s journey” below:

“Car leasing explained” interview on LBC 97.3 FM

Want to find out more about car leasing…?

Listen to a recent interview with Paul Fagan on James Max’s “Business Matters” radio show, which answers some of the most frequently asked questions about what makes car leasing so popular.

Broadcaster James Max has a wealth of experience in property, business and finance and was a semi-finalist in the first series of BBC2’s acclaimed series, The Apprentice. In his weekly radio show on LBC 97.3 FM, James covers a broad range of subjects related to property and finance.

To listen to the car leasing interview on LBC 97.3 FM

Contract Hire and Personal Contract Hire (PCH)

One of the most popular forms of car leasing in the UK is Contract Hire (including Personal Contract Hire), which is available to both business users and consumers (private individuals).

Contract Hire offers most of the benefits of car ownership, but without many of the hassles normally associated with it; in essence, you lease (long-term hire) a brand new car for a fixed period – normally two or three years – at a predetermined annual mileage allowance to suit your needs.

Contract Hire is a simple and very cost effective way to fund any number of vehicles. Simply choose the vehicles you want, we deliver your new car to your door and you pay a fixed amount every month.

These payments go on for an agreed period of time, usually between one and four years. At the end of your car lease agreement, we collect your car (which is then sold back to the motor trade, normally through a trade auction) and you’re free to choose another vehicle.

Importantly you never own the vehicle, we do. As it never appears on your balance sheet, it remains a business expense. Because we take the vehicle back, we agree up front the mileage your drivers will do on an annual basis and the number of years the contract will run.

Using this information, we calculate how much the car will be worth at the end of the contract, which is factored into your monthly payments.

A typical new car buyer’s journey

So, how do you go about buying a new car…?

Well, your quest might start by taking a look at a manufacturer website for a car that you’ve seen advertised or that drove past you in the street one day. This is normally followed by a visit to your local dealership, so that you can see the car for yourself.

Of course, not wanting to be “taken for a ride” – so to speak – you’ll want to compare the price that your local dealership gives you with one – or even two – other dealerships, just to make sure that you’re getting the best price.

Finally (and certainly for the more tech-savvy) you’ll want to shop around online, just in case there are better deals somewhere out there in cyberspace.

So, although it has taken some time and considerable effort, you’re somewhat satisfied that you’re getting a good deal, so you buy your new car. But whether you buy the car with money from a savings account or you take out a loan to cover the cost, you’ll need to factor interest into your calculations, not to mention road tax (for as long as you keep the car) and depreciation (which is the difference between what you bought your car for and what you will sell it for in the future) when working out your motoring costs.

And the headaches don’t stop there; after happily motoring along for 2 or 3 years, you’re ready to change your car again. You’ve already decided on your next new car, but, you have a problem: How do you dispose of your current car…?

Naturally, you could advertise your car for sale online or in the newspaper, but you’d really prefer not to have strangers coming to your house. Besides (given your hectic schedule), weekends and evenings are sacrosanct – quality time to be spent with your family; you’d rather not waste your precious time haggling with “tyre-kickers” over what they think your car is worth.

Or you could always trade-in your car at the dealership where you’re going to buy your new car, but of course you probably won’t get the best price for it, as they need to build in a margin to resell your car on their forecourt.

However you do finally manage to sell your car, it’ll certainly take time, effort and may even end up costing you money.

And what’s the alternative…?

Well, leasing a new car could be your answer.

With used car values falling year-on-year, coupled with an uncertain economy and rising household bills, the growing risks associated with new car depreciation have forced car buyers to look at cost-saving alternatives.

And being the most advanced car leasing market in Europe, the UK has no shortage of leasing companies, whose expertise is in buying hundreds of thousands of new cars every year and recycling them back into the increasingly voracious used car market at end of contract.

More often than not, if you’re looking to change your car regularly (say every 2 or 3 years), car leasing works out less expensive than ownership, because not only are you tapping-into the buying power of the big leasing companies, you’re also removing the costs and hassles of selling your car when you’re ready to change again.

An even more compelling reason is that you don’t even need to hunt from dealership to dealership, as the best leasing rates can often be found online, at a time that is convenient for you – day or night.

And it’s the convenience and the ability to manage your motoring costs more effectively – coupled with the cost saving benefits – that are leading to unprecedented levels or personal car leasing in the UK.

Why choose Contract Hire?

Contract Hire is quickly becoming the #1 choice for motorists throughout the UK. There are many reasons why Contract Hire is so popular:

  • It offers off balance sheet funding
  • It is a VAT efficient way of operating a company car
  • It provides fixed motoring costs for the contract period
  • It removes the uncertainty surrounding future, ever fluctuating residual values
  • It allows to you takes advantage of Car leasing made simple™ purchasing power
  • It frees up your staff time, by reducing in-house administration
  • It offers detailed reporting is required
  • It is available with an optional monthly maintenance charge (which covers routine maintenance and servicing costs)

Low monthly rentals

There’s no large initial outlay and monthly payments are fixed, so it’s good for cash flow and makes budgeting a cinch.
You pay a fixed monthly rental and – at the end of the contract – hand the car back to the leasing company with nothing to pay (provided that the car meets the mileage and condition criteria agreed at the start of the contract).

Hassle-free motoring

So you don’t have the hassle of selling the car when you replace it. It also means you don’t have to worry about the risk of falling used car values (known as residual values). If the second-hand car market drops suddenly, that’s the leasing company’s problem, not yours.

Good for business

Most of the fleet management can be handled by the fleet provider, which frees up company resources and the funding isn’t shown on the balance sheet, which reduces a company’s debt liability and helps to improve your corporate credit rating.

End of contract

At the end of a contract hire agreement – after the vehicle is returned – car leasing companies will charge for any excess mileage (over and above the total contracted mileage) and any damage (or unfair wear and tear) on the vehicle. These charges can vary from reasonable to very steep – depending on the leasing company – so it is advisable to check the small print on your contract before you sign. Also, if you end (early terminate) a contract hire agreement early, the penalties can sometimes also be quite high – typically 50 percent of the remaining rentals. So if you’re unsure about the length of time that you want to keep the car, it may be more prudent to pay slightly more per month for a shorter contract length.