Leasing is becoming an increasingly popular way of getting on the road. Industry figures show that the number of us choosing to lease rather than buy is going up by 10% each year, but what exactly is leasing all about? How does it work, and is it better than buying?
How Leasing Works
The easiest way to think about leasing is as a long term car rental. If youíve ever rented a car when youíre on holiday overseas youíll know how this works. You agree a daily or weekly rate with the rental company then all you need to do is pay for your fuel. If your rental car breaks down or needs new tyres, those costs are covered by the hire company. If you are involved in an accident, then thatís covered by your insurance. Lease agreements are just the same, although the hire period is generally two or three years rather than just a couple of weeks. Car leasing is also sometimes called Personal Contract Hire, or PCH.
What the Lease Covers
When you choose to lease a car, most of the motoring costs are rolled into the monthly fee you pay to the lease company. This includes servicing, repairs, car tax, insurance Ė everything apart from fuel. You will have to abide by certain conditions though, mainly stemming from the fact that you never actually own the company. It remains the property of the lease company at all times. So youíll need to get their permission to add a roof rack or tow bar, for example. If you need new tyres or a repair, then you have to take your car to the garage of the lease companyís choosing. The lease company will also set restrictions on who can drive your car. There will be extra charges for additional drivers, and itís a common restriction to ban all drivers under the age of 25. Drivers have to pay for the fuel they use in their car and the lease company might also charge for any damage which has been caused to the car through negligence.
Advantages of Leasing
Leasing a car has a number of advantages. The first is the simplicity. You commit to paying a set fee every month and apart from adding fuel, thatís it. No need to worry about unexpected repair costs or servicing charges. If youíre the sort of person who likes to budget, this can be a huge advantage. Lease deals are also a good way of getting a new car every two or three years depending on the length of the lease you sign up to. In recent years, many dealers have been extending the lease model into used cars too, especially with premium brands. If youíre a business owner who is weighing up leasing over buying for a company car fleet, leasing often has significant tax advantages, so take advice from your accountant before deciding on the best course of action.
Disadvantages of Leasing
Leasing is a great model for many drivers, but doesnít work for everyone. Firstly, thereís the cost aspect. If youíre leasing a brand new car which is unlikely to develop major faults and require expensive repairs, itís often better value to take out a loan from the bank and buy the car. And at the end of the lease, you have an asset to show for it. Many people get into the habit of changing their car every two years, constantly making payments and not having an asset to show for it. Youíre also committing to paying the lease payments for the duration of the agreement, so if your circumstances change and you want to leave the deal early, this could be expensive. If you donít set up the agreement properly, then it could cost you huge sums at the end of the lease.
Setting Up the Lease
There are a few things you have to be very clear about when taking out any new lease agreement. Perhaps the most critical thing is the mileage. As leases are based on the estimated value at the end of the lease period, you have to estimate how many miles the car will have done by the time you hand it back. If you underestimate, you will pay any extra miles at a set fee. If you get the mileage very wrong, you can end up with a bill for hundreds of pounds at the end of the lease. And unfortunately, it doesnít work the other way around Ė you wonít receive a fat cheque if youíve underestimated the mileage instead.
You should also be clear about the tax and MOT situation. All vehicle owners have to pay car tax, and in most cases this is taken care of by the leasing company. However, as the driver itís you who will get the points on your licence if youíre driving around in an untaxed car. You can check online to make sure the lease company are doing their job by paying the car tax when it is due. All you need to do this is the carís registration number. If you discover any problem, raise this with them straight away. Similarly, if youíre leasing an older car it might require an annual MOT. The lease company should keep on top of when tests are due and liaise with you over getting the car booked in, but you can also check online to see when the current MOT expires.
Remember also that not all costs for damage are covered by the lease company. If you let the kids spill food or drink all over the upholstery or repeatedly scratch the bodywork getting in and out of parking spaces, then this is unlikely to be classed as reasonable wear and tear. An inspector will look over the car at the end of the lease, and youíll be sent an invoice for each ding or scratch on the car. If youíre a careless driver, this could again result in a hefty bill.
Image credit: Leasing a Car via Maksym Povozniuk/Shutterstock