How Does Leasing A Car Work? Everything You Need To Know About Leasing & PCH Explained

Everything you need to know about how car leasing works, the pros and cons, what is included and whether leasing is right for you.

Contents

• How Does Car Leasing Work?
• What Is Included With Car Leasing?
• What to Consider Before Leasing A Car
• What Are The Advantages Of Leasing A Car?
• What Are The Disadvantages Of Leasing A Car?
• What Is The Difference Between Leasing And Buying A Car?
• How Are Monthly Leasing Payments Calculated?
• What Credit Score Do You Need To Lease A Car?
• How To Lease A Car
• What Happens When A Lease Runs Out?

How Does Car Leasing Work?

One of the most popular types of car leasing is PCH, or ‘Personal Contract Hire’, as it’s one of the easiest and most affordable ways to drive a brand-new car.

It’s an ideal choice if you want fixed-cost motoring and you’re confident about the mileage limit and condition of the car over a set period of time. PCH is easy and cost-effective, and it allows you to control one of your biggest expenses. There are no hidden extras and it’s available with or without a maintenance package.

You’ll pay one upfront payment, known as your initial rental, and then make regular, fixed monthly payments until your contract ends.

Contracts usually last between two to five years, and when the contract ends, you simply return the vehicle and upgrade to a new car – just like you would a mobile phone contract.

Leasing is effectively like a long-term rental and is an increasingly common alternative to buying a car outright. It removes the need to use other costly financial options, such as taking out a personal loan.

Personal Contract Hire is similar to Business Contract Hire but, as an individual, you won't be able to recover any VAT or take advantage of any tax allowance whereas limited companies, sole traders and other businesses can. If this applies to you, make sure to opt for a business lease deal to save even more money on leasing your next vehicle.

What Is Included With Car Leasing?

Your lease will include:

• A new car of your choice.

• Free delivery to mainland UK.

• A full manufacturer's warranty.

• Road tax is already included in your monthly rentals.

• Free collection when the deal ends.

You can also add a maintenance package to your contract as an optional extra, which includes servicing, tyres, routine repairs and replacements.

What To Consider Before Leasing A Car

Contract Length - Think about how long you’d like to drive the car. The longer the contract, the lower the monthly cost. The contract being longer does, however, mean you have to wait longer to upgrade what you drive again.

Mileage - Think about how many miles you’re likely to drive over the length of your contract. The annual mileage you select will affect the price of your lease.

Admin Fees - Some leasing brokers charge admin fees for handling your leasing arrangement upfront. Leasing with Vanarama guarantees no admin fees are applied.

Insurance - You will need to insure the car and include this when you’re working out your budget as this will not be included in your lease. You should also consider Gap Insurance. If your leased vehicle is stolen or written off, you could owe the finance company if your remaining payments are more than the insurance payout.

What Are The Advantages Of Leasing A Car?

• Low deposit and low monthly rentals - PCH is one of the most cost-effective options if you need full use of a vehicle but don't require final ownership.

• Fixed-cost motoring with the option to add maintenance.

• Allows you to change your vehicle more often.

• There’s less admin to deal with because the finance company deals with all the buying and selling issues.

• Our strong relationship with manufacturers means more choice of vehicles for you. 

• We work with multiple finance companies to ensure we only offer the best lease prices available on the market.

• No need to deplete your savings with costly balloon payments.

• No depreciation risks.

What Are The Disadvantages Of Leasing A Car?

• You will need to accurately estimate how long you want to drive your car and the number of miles you’re likely to drive in that time. 

• If you go over your agreed mileage allowance, excess mileage will be charged for each mile over that which is stated in your contract.

• You do not own the vehicle.

• The cost to terminate the contract early can be expensive.

• You must look after the vehicle and return it in a well-maintained condition. If not, you will be charged for any damage over and above that stated in the 'Fair Wear and Tear Guide'.

What Is The Difference Between Leasing And Buying A Car?

With Personal Contract Purchase (PCP), you have the option to buy the car at the end of the contract by making a 'balloon payment', which is equivalent to the remaining value of the total cost of the car. This balloon payment is agreed at the beginning of the PCP contract, so if your car is worth less than expected you will be in negative equity and end up paying more than your car's real value.

When you lease with Vanarama and PCH you don't own the car, but you do not need to worry about the car's value when the leasing agreement ends. Learn more about Car Leasing vs. PCP in our simple guide.

Are There Any Limits To Car Leasing?

There aren't many restrictions when you lease a car – you can tailor the deal to suit your requirements and budget.

Be aware that you will be charged extra if you exceed your agreed total annual mileage. If you aren't sure how many miles you drive each year, it's better to overestimate this at the beginning of your lease. You should always inform the leasing company if you think you're going to go over your mileage allowance.

Lease cars also need to be returned in good condition. The company will consider any damage to the vehicle according to the BVRLA's Fair Wear and Tear guidelines, but serious damage must be repaired to the minimum standard. For example, a single minor scuff on one panel of the vehicle's paintwork (no larger than 25mm) is considered acceptable, but you'll need to pay to fix large dents or deeper scratches.

One other thing to consider is that you need permission to take your car abroad when you lease. You can request a letter of authorisation from us and we'll be happy to provide the documents.

What Credit Score Do You Need To Lease A Car?

When lending money for a lease, finance companies need to be confident that you'll be able to pay them back. They assess this confidence in the form of a credit score; so for a finance company to agree to your lease, you'll need a good score. Find out more about car leasing and credit in our easy-to-understand guide.

How To Lease A Car

When you lease a car there are a few simple decisions to make to ensure you’re getting the perfect vehicle and financial agreement for your needs:

1. Choose The Car You’d Like To Drive - Consider the kind of car you want to drive. Do you have a specific manufacturer in mind, such as Mercedes-Benz or BMW? You might know exactly what model you want which will make your search easier.

2. Choose How Much Your Deposit & Monthly Payments Will Be - The higher the deposit, the lower your regular monthly payments will be.

3. Decide How Long You Want To Keep The Car - The length of your agreement until you return the car.

4. Choose Your Annual Mileage - A pre-agreed allowance of mileage for the duration of your agreement. For example, a 3-year contract with 10,000 annual miles is actually 30,000 miles over three years.

5. Decide On Any Extras - Choose if you want to add a maintenance package to your lease.

6. Order Online - Finalise your order online.

7. Credit Check - After choosing a vehicle and tailoring your finance agreement, you will need to undergo a credit check. This is when the finance company verifies that you can comfortably afford the payments.

8. Approval & Contracts - Once your finances have been approved you’ll need to sign some documents to finalise your lease.

9. Delivery - That’s it, your car will be delivered free, safe and contactless direct to your door.

What Happens When A Lease Runs Out?

When the contract finishes, the car is returned to the finance company. It will be inspected for damage and excess mileage. But don't worry too much about the end-of-contract damage charges - you've been driving the vehicle for up to 5 years, a bit of damage is to be expected, that's why it's called ‘Fair Wear and Tear’. Take a look at our comprehensive Wear and Tear guide for more information.

Sometimes, when a lease ends, a formal or informal extension can allow you to keep the vehicle for a bit longer, here are brief explanations of both types:

What Is A Formal Extension? A formal extension is a new and agreed extension of your lease contract made between you and the finance company or funder that your lease was originally arranged with. It allows you to keep the vehicle slightly longer for a fixed period (usually 6 or 12 months). A formal extension can only be arranged once and the vehicle must be handed back at the end of this new agreement. A formal extension agreement must be signed and will contain the following:

• The new monthly rental cost (this may go up or down, but will be confirmed before you sign the agreement).
• The agreed extension period (usually 6 or 12 months).
• The agreed new annual mileage allowance.
• The new end date.
• Any servicing/maintenance packages and the costs.
• Any administration fees for arranging the formal extension.

What Is An Informal Extension? As opposed to a Formal Extension (which requires a new financial agreement to be signed with the funder or finance company), an Informal Extension is simply where you keep the vehicle past the original contract date without a new financial agreement put in place. Some funders or finance companies will allow Informal Extensions, others will not, so check your contract to see if yours will. In an Informal Extension, the following circumstances must be noted:

• The funder or finance company can ask for the vehicle back at any time.
• Your mileage allowance cannot be changed. If you exceed your previously agreed mileage allowance, you will be charged on a pro-rata basis.
• Your monthly rental payments will stay the same as previously agreed.
• The date on which your monthly rental payments are taken each month might change.

How To Get Out Of A Car Lease Early?

If you need to postpone or cancel your order before delivery, we will give you a full refund.

If it's later into your agreement and your circumstances change, contact us as soon as possible so we can offer advice on what to do next. If you need to cancel your contract early there is likely to be an early termination fee. However, we may be able to help you extend your contract and lower your monthly payments to make them more affordable so do get in touch.

For more information, read our guide on terminating a lease contract early for an in-depth look at the options available.

Where To Lease A Car

Having read our simple guide, and if leasing sounds like it's right for you, start your search online and check out our available cheap car leasing deals. Or if you’re thinking of going electric, find out everything you need to know about leasing an electric car.