Car leasing allows you to get the use of a vehicle without taking ownership of it.

You lease the car over a period of time (known as the 'term') during which the vehicle is still owned by the leasing company (the 'lessor') but is rented to you (the 'lessee').

Effectively car leasing is borrowing the vehicle from someone for a fixed period in return for a monthly payment.

What's In Car Leasing Rentals?

During the car lease period you pay a monthly rental to the leasing company.

The monthly rental covers the costs incurred by the leasing company to operate the vehicle, plus a profit for them too.

In other words, you pay the leasing company for:

• Depreciation in the value of the car over the life of the lease
• Vehicle Excise Duty (the 'tax disc')
• Interest Charges on the money borrowed by the car leasing company to buy the vehicle
• The leasing company's profit margin (which might be just the interest charges but could also include something in the final value of the car)
• VAT on the rentals

Optionally you may also be able to include a contract to maintain the car for you as well.

What Happens When The Lease Ends?

At the end of the car lease you return the vehicle to the leasing company. The leasing company sells the car and takes any profit or loss on the sale.

What Do You Pay For?

With car leasing you are basically paying for depreciation and interest, but because you only pay back the depreciation part of the car's price the interest included in a car leasing deal is usually more than in an equivalent hire purchase deal.

This is because each monthly car leasing payment only reduces the outstanding balance of the car's purchase price by a proportion of the forecast depreciation, not the full purchase price.

However, repaying a lower amount of the purchase price each month means that the actual monthly payments are lower in car leasing than for hire purchase.

Advantages of Car Leasing

Because the leasing company recovers VAT on the price of the vehicle the rentals for passenger cars will be lower than comparable finance instalments for Personal Contract Purchase (PCP), even though the leasing company must add VAT to the monthly rentals.

Because the vehicle is leased, the normal responsibilities of ownership, such as sourcing the best deal and obtaining the best resale (or 'residual') value, are avoided, as is the risk of the residual value being less than expected.

In effect, you simply operate the vehicle rather than owning it, so car leasing is sometimes referred to as an 'operating lease'

Disadvantages of Car Leasing

If the lease agreement is terminated earlier than expected then you will usually be required to pay a penalty (usually a number of months' rentals).

In addition, if the vehicle is returned with more mileage than that agreed for the term of the lease, or is not in a condition appropriate for it's age and the lease mileage, then 'end of contract' surcharges may be made by the leasing company to cover the excess mileage or wear and tear.

Lease or Buy?

To see the cost impact of leasing or buying your next new car click here.