Is car leasing rather than ownership right for you?

Mouthy Money’s latest article focuses on car leasing rather than ownership, and whether it is right for you?

I guess I’m not being controversial when I say car ownership is expensive. And buying a new car in particular can be a major investment, especially if you want one of the latest electric or hybrid models. Even used cars (quality ones anyway) have shot up in price over the last year or two.

It’s not surprising, therefore, that growing numbers of people are turning to leasing as a more affordable alternative to buying outright. The British Vehicle Rental and Leasing Association (BVRLA) estimates that five million vehicles on Britain’s roads today are leased, 1.9 million to private individuals and the rest to businesses and other organisations. 

Today I shall be looking at car leasing in more detail and setting out some of the pros and cons. Let’s start, though, by looking at the main financial options for getting a car.

1. Pay cash. This is fine if you have the money but, as mentioned above, if you want to buy anything decent it will be expensive. Even if you have the money, spending it all on a car might leave you short for other things. You will also forfeit the ability to invest it.
2. Personal loan. This can work for some people but interest charges can be steep. And if your credit record isn’t great this option may not be available to you.
3. Hire Purchase (HP). This spreads the cost over a deposit and series of fixed monthly payments. At the end of the agreement, you can pay a modest ‘option to purchase’ fee and you’ll then own the car.
4. Personal Contract Purchase (PCP) – This option requires you to pay a deposit, monthly payments and a final lump sum, usually known as a balloon payment. You aren’t obliged to pay the latter. If you decide you don’t want to own the car, you can simply hand it back.

The final option is car leasing, also known as Personal Contract Hire or PCH for short. Unlike the other options listed above, with leasing you never actually own the car. Basically you rent it for (typically) two or three years at a fixed price and return it at the end of the lease period, most likely then replacing it with a more modern model.

Leasing Pros and Cons

The main advantages of leasing are as follows:

• No worry over depreciation. You simply pay an agreed fixed price over the duration of the contract and return the vehicle at the end.

• Can be cheaper than HP or PCP as the cost doesn’t have to allow for the option of keeping the car. 

• Premium brand cars can be surprisingly affordable, as the leaser knows the car will retain a good proportion of its value at the end of the lease.

• Leasing can also be more accessible if your credit record isn’t 100%.

• You have the ability to change cars easily and keep up with the latest models.

• Typically the down payments required for leasing are lower than for HP or PCP.

• Maintenance costs are typically lower, as new cars are still under the manufacturer’s warranty. Also, cars under three years old don’t require an MOT.

• Growing numbers of companies now offer packaged leases, which include insurance, road tax and servicing costs, all rolled into one monthly bill.

Leasing does have a few drawbacks as well.

• The car never actually belongs to you, which some people feel uncomfortable with.

• There will be mileage limits, and if you exceed these you will be charged extra.

• Also, if the car is damaged (beyond normal wear and tear) you may be billed for this at the end of the lease.

• You are unlikely to be allowed to make any modifications to the car.

Weighing it up

As you will gather, there are pros and cons to car leasing. While it may be a good option for some, it will be less attractive for others. Here are a few closing thoughts to help you decide…

• If you like to drive a new car and change it every two or three years, leasing may well be the best and most economical option for you. 

• On the other hand, if you tend to keep cars longer, other options such as HP or PCP may work out cheaper overall. That’s because once the price of the car is paid off, you will continue to have the benefit of driving it for as long as you hang onto it.

• If you tend to become emotionally attached to your car and like to keep it as long as possible, leasing will clearly be unsuitable for you. The same applies if you like to personalize and/or modify your vehicle.

• Leasing is mainly associated with new cars, but you can lease used cars as well. However, the advantages over other financing options may be less clear cut. If considering leasing a used car, it’s therefore very important to check and compare the price (and terms) of leasing with other options such as HP.

• Leasing may be particularly attractive if you want to join the EV (electric vehicle) revolution. By leasing a new electric car you can ensure you are getting the best, most modern technology, and can easily exchange it in due course for the latest model. With EV technology developing so rapidly at the moment, there is clearly a lot to be said for this.

• Leasing can also be an attractive option for older people on fixed incomes, as the set monthly payments make budgeting easier. And at the end of the lease you can simply hand the car back without the hassle of having to sell it.

I hope you have found this article of interest and it has given you some points to consider if you are thinking of getting a new car. 

As always, if you have any comments about car leasing, or experiences of your own you would like to share, please do leave them below.

Nick Daws writes for Pounds and Sense, a UK personal finance blog aimed especially (though not exclusively) at over-fifties.

Photo by Oli Woodman on Unsplash