How does leasing a car work?

How does a lease work with a car, and how might such an agreement benefit you? In this guide, we'll cover all the key information about car leasing, including pros and cons – as well alternative options.

Car Leasing Explained

When a person or entity wants to lease a car, what does it mean? Car leasing is effectively a long-term car rental. You agree to pay a fixed monthly fee for the car – usually spanning 1–4 years – and then return the vehicle at the end of the lease.

Personal Contract Hire Explained

Personal Contract Hire (PCH) is the most common type of car leasing for individuals in the UK.

Key points about PCH:

● You never actually own the car.

● You pay an initial rental fee (similar to a deposit) and then monthly payments.

● You give the car back at the end of the lease.

So what is Personal Contract Purchase (PCP)?

Personal Contract Hire (PCH) and Personal Contract Purchase (PCP) are often confused with each other.

With PCP, you have the option of buying the vehicle at the end of the agreement by paying a "balloon payment."

If you don't wish to buy the car, you can simply return it or trade it in for another model.

PCP agreements are not dissimilar to loans, since the interest rate you pay is based on the full value of the vehicle when new.

Conversely, a lease interest rate is based on what the vehicle is expected to be worth at the end of the agreement (its residual value).

If you decide to take the PCP route instead of PCH, look for an agreement with low interest payments.

Note: It's possible to finance a used car with a PCP agreement, while PCH leases are nearly always for brand-new cars.

How to Car Lease: PCH Leasing in 4 steps

1. Choose a car that meets your needs (and wants!). Note that PCH leases are nearly always for new cars.

2. Select the terms of the lease:

○ Duration: Minimum 12 months, maximum 48 months.

○ Mileage: Choose your expected annual mileage (usually between 8,000 and 20,000 miles). Note: Your monthly payments will vary depending on your selected terms.

3. Make the monthly payments: These are fixed throughout the contract.

4. Lease ends:

○ Return the car by the lease end date.

○ Pay for any excess mileage or damage beyond normal wear and tear.

How much does leasing a car cost?

The cost of leasing a car under a PCH agreement can vary dramatically depending on the car model, lease length, and mileage limit.

Three main costs:

● Initial payment: £1,000–£3,000, depending on the car. A higher initial payment usually means lower monthly payments.

● Monthly payments: Typically range from £150–£600+.

● Excess mileage charges: Around 4p–15p per mile over the agreed limit.

What are the benefits of a PCH lease?

● It's an simple, hassle-free, and affordable way to drive a brand-new car.

● Monthly payments are lower than both PCP agreements and Hire Purchase (HP).

● You can switch to a new car every few years, so you’re always driving the latest model.

● A manufacturer warranty is usually included.

● No need to worry about selling the car later.

● No MOT needed for the first three years.

● New cars are much less likely to break down.

● Road tax is included.

What are the disadvantages of a PCH lease?

● You never actually own the car.

● There are mileage and condition limits to consider, which might be stressful if you drive long distances or damage the vehicle.

● If you end the contract early, you may face hefty 'early termination' fees.

What's included with PCH car leasing?

● Road tax (Vehicle Excise Duty) is included for the entire lease term.

● Free delivery to your home is usually included.

● Warranty coverage, typically for at least three years.

● Maintenance packages are often available for an additional fee. This saves you the hassle of finding a garage to service your car.

Do I need a good credit score to lease a car?

As with all financial products, having a good credit score will make it easier to secure a lease. If you have a poor credit score, you may not qualify for a PCH agreement.

Is insurance included when leasing a car?

As with any car, you must have insurance before driving a leased vehicle. In almost every case, comprehensive cover (not just third-party) is required.

Note: The lease funder will be listed as the owner on the insurance policy – not you.

How to Car Lease: FAQs

How does delivery work?

The car will be delivered to your driveway. You and the funder will agree on a delivery time. The cost of delivery is usually included in the initial or ongoing payments.

Who is the registered owner?

The registered owner is the funder – not you. However, you are responsible for taking good care of the vehicle, as if you were the owner.

What about maintenance costs?

Most providers offer optional maintenance and service packages for an additional fee. These can make it easier to keep your vehicle in safe working condition.

What about road tax (VED) and MOTs?

Road tax is included in your monthly payments. MOTs aren't needed for the first three years of a new car.

What if I exceed my agreed annual mileage?

You’ll be charged for excess mileage, typically calculated per mile over the limit in your agreement.

Can I terminate the lease early?

You may be able to terminate the agreement early, but it's at the provider's discretion. Early termination fees can be substantial.

Can I lease an electric car?

Yes, electric vehicles (EVs) can be leased just like petrol or diesel cars.

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