What Is Car Leasing? The Complete UK Guide to Leasing a Car

Car leasing has become one of the most popular ways to get behind the wheel of a brand-new car, but it is also one of the most misunderstood.

Is leasing basically renting? Do you ever own the car? What happens if you go over your mileage? Is that attractive £299-a-month deal actually £299 a month? And perhaps most importantly, is leasing better than PCP or Hire Purchase?

The short answer is that car leasing, usually called Personal Contract Hire or PCH when you are leasing privately, is a long-term rental agreement. You choose a new car, agree how long you want it for and roughly how far you expect to drive, then pay an initial rental followed by fixed monthly payments. When the agreement finishes, you return the car.

There is no balloon payment and normally no decision to make about whether you should buy it. You simply give it back.

That lack of ownership might immediately make leasing sound like poor value, but it misses the point of the product. If you normally change your car every three or four years anyway, leasing can be one of the simplest and sometimes most cost-effective ways of doing it.

I've spent years around the vehicle leasing industry, so this guide isn't intended to tell you that everybody should lease. They shouldn't. Instead, I'm going to explain where leasing makes sense, where it doesn't, and how it compares with the other ways of funding a new car.

The quick answer: is car leasing worth it?

For the right driver, absolutely. Car leasing is particularly attractive if you:

It is probably less suitable if you:

The key question is therefore not "is leasing cheaper?"

It is "what do I actually want from my next car?"

What exactly is car leasing?

Personal car leasing is more formally known as Personal Contract Hire, or PCH. Rather than borrowing money to purchase the vehicle, you are hiring it from a leasing company for an agreed period.

A typical agreement might look something like this:

36 months | 8,000 miles per year | 3 months initial rental | £300 per month

You choose the car and specification, agree your contract and mileage, complete a credit application and, once everything is approved, the vehicle is supplied to you.

You then use it as your own car for the duration of the agreement. You insure it, put fuel or electricity in it, clean it, service it and generally take responsibility for looking after it. The important difference is that you never become its legal owner. When the contract finishes, the leasing company collects the vehicle.

Why can leasing be cheaper than buying the same car?

This is where leasing becomes interesting.

If you take out Hire Purchase on a £40,000 car, you are ultimately financing virtually the entire £40,000 purchase price because the objective is to own it.

With leasing, the vehicle still belongs to the leasing company when your agreement ends. The monthly rental is heavily influenced by how much value the vehicle is expected to lose while you have it.

This is why two cars with almost identical list prices can have dramatically different leasing costs.

Imagine a £40,000 Car A is expected to be worth £24,000 in three years, while a £40,000 Car B is expected to be worth only £18,000.

All else being equal, Car A is much more attractive to a leasing company because it expects to recover more money when the vehicle is returned and sold.

There are plenty of other factors involved, including funding costs, manufacturer support, discounts, expected mileage and market demand, but residual value is enormously important to leasing.

It is also why you occasionally find a surprisingly expensive car available for less per month than something with a lower showroom price.

When shopping for a lease, forget some of your assumptions about list prices and see what the market is actually offering.

How does leasing a car work?

The process is relatively straightforward.

1. Choose your car

Start with what you actually need rather than automatically chasing the cheapest monthly payment.

Think about passenger space, boot capacity, range if it is electric, fuel economy, insurance and the type of driving you normally do.

One of the benefits of leasing is that special offers can sometimes put cars that would normally sit outside your budget within reach.

Equally, don't spend an extra £100 every month simply because the monthly figure makes a much more expensive car feel affordable.

2. Choose your contract length

Most car leases run for somewhere around two to four years, although other terms can be available. A longer agreement doesn't automatically mean a better deal. A 48-month contract may lower the monthly rental, but you need to ask whether you genuinely want to be driving that particular car in four years' time.

Three years is popular because it gives you a reasonable period with the vehicle while keeping you relatively close to the cycle of new models and technology.

3. Estimate your annual mileage

You might choose 5,000, 8,000, 10,000, 15,000 or more miles per year depending on the agreement.

The more miles you cover, the less the car is likely to be worth when it comes back, so higher-mileage leases generally cost more.

Be realistic.

If you currently cover 11,000 miles a year, choosing a 5,000-mile agreement purely because the advertised rental looks cheaper is unlikely to be clever.

4. Decide your initial rental

This is an important bit of leasing terminology.

You'll often see agreements described as:

• 1 + 35
• 3 + 35
• 6 + 35
• 9 + 35

On a three-year lease, this means an initial rental equivalent to one, three, six or nine monthly payments, followed by 35 monthly rentals. If the normal rental is £300 and you choose a 9 + 35 profile, your initial rental could therefore be £2,700. That does not mean you have put a £2,700 deposit into the car. It is simply a larger first rental. You don't get it back at the end and it doesn't create equity in the vehicle.

5. Complete a credit application

Personal Contract Hire involves a creditworthiness and affordability assessment. The finance provider will want to be comfortable that the agreement is affordable and that you are likely to make the payments.

As with other financial commitments, missed payments can affect your credit history, so never stretch your budget simply because you have been approved.

6. Take delivery and enjoy the car

Once the vehicle is ready and the paperwork is complete, it is delivered or collected depending on the arrangement.

From that point, it is essentially your car to use for the agreed period, subject to the contract conditions.

7. Return it at the end

Towards the end of the agreement, collection is arranged. The vehicle's mileage and condition will be recorded and it will be assessed against the appropriate fair wear and tear standards.

Assuming everything is as expected, you hand over the keys and walk away. You can then lease another car, buy something completely different or decide you no longer need a car at all.

What is an initial rental and why isn't it a deposit?

This is one of my biggest frustrations when leasing is discussed online. People frequently call the initial rental a deposit, but the two things aren't really the same. A deposit suggests that you are building up some kind of ownership or refundable stake in the car. You aren't. The initial rental is simply part of the overall cost of hiring the vehicle. And this leads me to one of the most important pieces of advice in this entire guide:

Don't compare lease deals using the monthly payment alone

Suppose you see this: £300 per month, 9 months initial rental, 36-month agreement

Nine months at £300 gives you an initial rental of £2,700. You then have 35 further payments of £300, totalling £10,500. Your total rentals are therefore: £13,200.

Spread across the full 36 months, that's effectively around £367 per month, before considering any separate fees or optional maintenance.

Suddenly, that £300-a-month car looks slightly different. This doesn't make the deal bad. It simply gives you a much more meaningful number with which to compare it. When comparing leases, look at the total contract cost, not simply whichever website has managed to display the smallest monthly figure.

Should I put down a bigger initial rental?

Not necessarily. A higher initial rental normally reduces your subsequent monthly payments, but it doesn't automatically make the overall deal significantly cheaper.

Personally, I'd compare several profiles. If 3 + 35 and 9 + 35 have broadly similar total contract costs, I'd question whether there is much benefit in handing over thousands of pounds more at the beginning just to make the monthly figure look nicer. Look at the whole agreement.

What is included in a car lease?

This varies, so always check your specific quotation and contract.

Typically, you are getting:

You will normally still be responsible for:

Don't assume a cheap lease is an all-inclusive motoring subscription. It isn't.

Is road tax included with a lease?

Road tax is commonly included within Personal Contract Hire agreements, but check the exact terms because changes in Vehicle Excise Duty during the agreement may sometimes be passed on.

This has become particularly relevant to electric cars.

EVs are no longer automatically exempt from Vehicle Excise Duty, so you shouldn't choose an electric car today assuming it will be road-tax free for the duration of your agreement.

The good news with leasing is that the administration is generally handled by the registered keeper rather than requiring you to remember to renew it yourself.

What about servicing and maintenance?

Unless your agreement says otherwise, you are still responsible for keeping the vehicle properly maintained. The fact that you don't own it doesn't mean you can ignore the service schedule.

Most leasing companies offer the option of a maintained lease. For an additional monthly amount, this can cover scheduled servicing and various maintenance items. Some agreements also include replacement tyres subject to their terms.

Whether maintenance represents good value depends on the car, agreement length, mileage and how expensive the vehicle is likely to be to maintain. For a relatively low-mileage two-year lease, you might decide to pay for servicing yourself.

For a higher-mileage four-year agreement on a premium car with large tyres, the certainty of a maintenance package could look much more appealing. Again, compare the total cost.

Do leased cars need an MOT?

A brand-new car does not usually require its first MOT until it reaches three years old in Great Britain.

That means many two or three-year leases never require an MOT while you have the car.

With a longer agreement, you may become responsible for ensuring an MOT is completed at the appropriate time. Check your agreement to see exactly who is responsible for arranging and paying for it.

Do I need to insure a leased car?

Yes. Insurance isn't normally included in a conventional PCH agreement, and the leasing company will usually require comprehensive insurance. Remember to check insurance prices before committing to the car.

A brilliant leasing deal isn't quite so brilliant if the car costs twice as much as you expected to insure. This is particularly important for younger drivers, people with limited driving histories and some newer electric or high-performance cars.

What happens if I exceed my mileage?

Your agreement will state an excess mileage charge, normally expressed as a cost per mile.

If your allowance works out at 30,000 miles over the whole contract and the car comes back showing 33,000 miles, the additional 3,000 miles can be charged at the contracted rate.

This isn't intended as a punishment.

Mileage affects a vehicle's future value, which is why the leasing company asked you to estimate it in the first place.

If your circumstances change significantly during the lease, contact the provider rather than simply ignoring the problem until collection day. Depending on the agreement, it may be possible to amend your mileage allowance.

What is fair wear and tear?

A three-year-old car with 30,000 miles on the clock is not expected to look as though it has just rolled out of the factory.

That is where fair wear and tear comes in. Normal deterioration from everyday use is expected. What isn't necessarily acceptable is damage caused by an accident, neglect, misuse or failure to look after the vehicle properly.

At the end of a lease, the vehicle will usually be inspected against defined return standards. If something falls outside those standards, you could receive a charge.

My advice is to find out which return standard applies to your agreement well before collection day rather than reading it for the first time while somebody is standing on your driveway inspecting the car.

Give yourself time to deal with obvious damage, locate spare keys, find charging cables and make sure everything originally supplied with the vehicle is still present.

Can I modify a leased car?

Major permanent modifications are generally a bad idea because you don't own the vehicle. Anything you change may need to be returned to standard before collection. If you are considering a modification, speak to the leasing company first. That includes seemingly harmless things such as aftermarket accessories, wraps or changes to wheels and suspension.

Can I take a leased car abroad?

Usually, yes, but there is some additional administration because you aren't the registered keeper.

If you take a hired or leased UK vehicle abroad, you normally need a VE103 vehicle-on-hire certificate as evidence that you have permission to use it outside the UK.

Speak to the leasing company in advance and make sure your insurance and breakdown cover are suitable for the countries you are visiting.

Don't leave this until the night before your Eurotunnel booking.

Can I end a car lease early?

Possibly, but this is one of the biggest disadvantages of PCH.

A lease is designed around you keeping the vehicle for the agreed term.

If you suddenly decide you don't want it anymore, you can't simply hand back the keys and stop paying.

An early termination charge may apply and can be substantial. In some circumstances, you could be responsible for a significant proportion of the remaining rentals.

This makes leasing less flexible than many people assume.

If your job, income, family circumstances or mileage are likely to change dramatically in the near future, think carefully before committing to a long agreement.

Car leasing vs PCP vs Hire Purchase

This is probably the comparison most people actually want.

There isn't one winner for everybody. What matters is what happens after those three or four years.

Why leasing can be better than PCP

PCP and leasing can look remarkably similar from the driver's seat. You have a new car. You make monthly payments. There is usually an agreed mileage. You may have to pay for damage if you hand the vehicle back. And after three or four years, plenty of PCP customers simply swap into another new car.

This is exactly why I think leasing deserves serious consideration.

If you enter a PCP with virtually no intention of ever paying the final balloon payment and owning the car, ask yourself what you are gaining from having that ownership option.

With PCP, you normally pay a deposit followed by monthly payments and interest. At the end, you can hand the car back, part-exchange it or pay the Guaranteed Minimum Future Value to keep it.

That flexibility has value. But you are paying for a product that provides that flexibility. With PCH, the proposition is much simpler: "I would like this car for three years. How much will that cost me?"

If leasing the same car has a lower total cost over your intended ownership period and you didn't plan to buy it anyway, PCH can make considerably more sense.

But PCP does have advantages

PCP is better if you genuinely aren't sure whether you'll want to keep the vehicle. At the end of the agreement, you have options. If the car is worth more than its settlement or guaranteed future value, there may also be some equity available when changing vehicles, although this is never guaranteed.

PCP agreements also have statutory provisions around voluntary termination once the relevant amount of the total agreement has been paid. Because that calculation includes the balloon payment, this can occur relatively late in a PCP agreement, but PCH doesn't offer the same voluntary termination right.

So I wouldn't say leasing beats PCP. I'd say this: If you already know you won't buy the car, compare PCH very carefully before signing a PCP.

Why leasing can be better than Hire Purchase

Hire Purchase serves a different purpose. With HP, you are financing the vehicle with the intention of owning it. As a result, your monthly payments are generally much higher because you are paying towards virtually the entire vehicle value rather than simply having use of it for a defined period.

If you want to buy a car and keep it for eight or ten years, HP could make far more financial sense than repeatedly leasing new cars. Eventually the finance ends and you have a car with no monthly payment. But if you know you will want another new car in three years, paying significantly more each month to work towards ownership may be unnecessary.

That makes leasing particularly attractive to the sort of person who has traditionally changed cars regularly anyway.

Is leasing just throwing money away because you don't own anything?

You'll hear this a lot. And technically, yes, after three years of lease payments, you don't own the car. But that doesn't automatically mean your money was wasted. You paid for three years' use of a new vehicle. The same principle applies to plenty of things we pay to use rather than own. More importantly, ownership itself isn't free.

Buy a £40,000 new car and sell it for £22,000 three years later and you haven't escaped the cost. You've experienced £18,000 of depreciation.

The relevant comparison is therefore not: "Do I own something?". It is: "What has having this car for three years actually cost me?" That total-cost approach is much more useful.

Is leasing good for electric cars?

I think leasing can be particularly compelling for EVs. Electric-car technology has been developing incredibly quickly. Range is improving, charging speeds are increasing, battery technology is changing and new manufacturers continue to enter the market.

That can make some buyers nervous about committing tens of thousands of pounds to a vehicle and guessing what the used market might think of it in four years.

With a lease, the future resale risk largely sits elsewhere. You know what you are paying to use the car during your contract. When it ends, you give it back.

If newer EVs suddenly offer dramatically more range, faster charging or completely different battery technology, you aren't faced with having to sell your current car into that market. Of course, the leasing company understands this risk too, so it will be reflected in pricing.

It doesn't guarantee every electric car will have a cheap lease. But as a way to try EV ownership without making a long-term commitment to one generation of technology, leasing makes a lot of sense.

Is the cheapest lease always the best lease?

Definitely not. Some of the best leasing opportunities come from being flexible about the exact car you choose, but that doesn't mean you should lease something completely unsuitable simply because the rental looks cheap.

Before signing anything, ask:

A £249 deal on the wrong car is considerably worse value than a £299 deal on the right one.

How do I compare two lease deals properly?

Ignore the headline price for a moment.

Write down:

Initial rental

plus

all remaining monthly rentals

plus

any compulsory fees

That gives you a much better picture of the cost of the agreement. Then divide it by the number of months if you want an effective monthly cost for comparison. After that, make sure both quotes use:

Only then are you comparing like with like.

Why do lease prices change so much?

Car leasing prices can sometimes appear bizarre. A deal can be brilliant one week and disappear the next. That is because leasing rates are influenced by much more than simply the manufacturer's recommended retail price.

Manufacturers may provide support to shift particular cars. Leasing companies may have agreed large volumes of vehicles. Predicted residual values can change. Stock levels matter. Interest and funding costs matter. A manufacturer may be approaching the end of a quarter and want to register more vehicles.

This creates opportunities. If you aren't absolutely fixed on one specific make, model, engine and colour, leasing can reward flexibility. Sometimes the smart question isn't: "How cheaply can I lease this car?" It is: "What are the best cars I can lease for my budget right now?"

Those two questions can produce very different answers.

Should I lease an in-stock car or factory order?

There are advantages to both. An in-stock vehicle can often be delivered relatively quickly and may have particularly strong financial support behind it.

A factory order gives you more opportunity to choose the exact specification you want but may involve a considerably longer wait.

If you're replacing another leased or financed car, pay particular attention to timing. You don't want your current agreement ending months before its replacement arrives.

What happens at the end of a car lease?

Returning a lease shouldn't be something you start thinking about the morning the collection driver turns up.

A few months before the end:

• Check your mileage.
  
• Read the applicable fair wear and tear guidelines.
  
• Inspect the bodywork, wheels and interior.
  
• Make sure servicing is up to date.
  
• Find the spare keys.
  
• Locate anything that came with the car, including parcel shelves, charging cables or accessories.
  
• Consider whether any obvious damage is worth professionally repairing.
  
• Then arrange collection according to your provider's process.
  
• The car is assessed and, if there are no outstanding issues, that is essentially the end of the agreement.
  
• There is something refreshingly simple about it.
  
• No photographing the car for an advert.
  
• No strangers asking for your "best price".
  
• No dealership telling you your immaculate pride and joy is apparently worth £4,000 less than you expected.
  
• No worrying about what the used market happens to be doing that week.
  
• You hand it back.
  

How do I choose a reputable leasing company?

Price matters, but so does who you are dealing with. Check who is actually providing the agreement and whether the broker or provider is appropriately authorised. The FCA Firm Checker is useful for checking the regulatory status of financial firms.

The BVRLA also operates a member directory, and its members have to follow an industry Code of Conduct.

I would also look at:

You are potentially entering a relationship that lasts three or four years. Saving £3 a month isn't much consolation if getting help becomes impossible the moment the car is delivered.

So, should you lease your next car?

If you like owning a car outright, keeping it for years and eventually reaching the glorious point where there are no monthly payments at all, leasing probably isn't for you. And that's perfectly fine.

But if you tend to change cars every few years anyway, the argument becomes much stronger. You aren't buying a £40,000 asset. You are effectively asking:

"How much will it cost me to have this £40,000 car on my driveway for the next three years?"

That's a different way of thinking about motoring.

Leasing gives you predictable payments, access to new vehicles, no balloon payment and no need to gamble on what your car might be worth when you want to change it.

In return, you accept that you won't own the vehicle, need to stick reasonably closely to your mileage, must look after it and could face significant costs if you need to escape the agreement early.

For many drivers, that's a perfectly reasonable trade.

And if you're currently looking at a PCP purely because that's what the dealership has put in front of you, I would always spend ten minutes checking the equivalent lease.

You might be surprised by what you find.

Trusted Sussex based car and van leasing broker, Rivervale are able to not only help you find the best deal, but also help answer any queries or concerns you may have. Check them out at rivervale.co.uk