What are the key benefits of leasing – not buying – your car?

AudiOver the last few years, there’s been a growing trend away from buying or owning a private car. Instead, leasing has become the car ownership structure of choice for many.

While leasing accounted for 29% of all new car purchases in the UK in 2015, between March 2016 and 2017, 86.5% of new private cars were bought via finance deals, mainly using Personal Contracts Plans (PCPs) – a flexible lease contract that allows the lessee to ‘buy out’ the car at the end of the period..

On the face of it, leasing a car is an easy deal. Find a car leasing company and choose your preferred car, then put down a deposit followed by a set number of fixed monthly payments. We found Oxfordshire’s Little Green Car Leasing a useful resource for this, and especially this helpful car-leasing guide for beginners. Effectively, you’ll be renting the vehicle for 2, 3 or sometimes even 4 years. While car leasing has been popular among business users for much longer, it has now become a very viable option for private individuals too. Why?

Key benefits of car leasing

Well, there are a number of obvious advantages of leasing over buying a vehicle:

• Predictable car ownership costs
When you lease a car, your monthly outgoings are fixed, give or take a tank of fuel. You know exactly where you are financially for the duration of the least term, which helps to make monthly household budgeting much easier.

• Depreciation – who cares?
A new car will lose its value quickly, especially in the first few years. This is a problem for car owners who have paid the full price, losing out when it comes to reselling the vehicle. However, it has no impact on the lessee. If you lease the car, you simply hand it back at the end of the lease term, meaning the car’s depreciation is no concern of yours.

• A new car every few years
One of the main reasons why drivers prefer to lease rather than buy a car is that you get a brand new car every 2-4 years, depending on the lease term. You don’t have to worry about selling the old car – you simply hand it back at the end of the period.

• Cheaper than buying a new car
Rather than committing to a big capital outlay to purchase a new vehicle (with or without finance), you only pay for the amount the car will depreciate while it is in your lease contract. That way, the cost is often more affordable. If you buy the car, not only will the deposit be substantially higher than the down payment required for the lease contract, a new car purchase loan will cost considerably more than a lease per month since you are buying the vehicle.

• Get a better car for less money
Even better, since you only pay for the depreciation, you may be able to choose a premium brand such as a Mercedes, Audi or BMW – marques whose value depreciates more slowly, which means they can be surprisingly affordable to lease.

Disadvantages of car leasing

Leasing your car sounds like a tempting proposition but are there downsides? Surely there must be circumstances in which a lease wouldn’t be the right solution. Well yes, there are a few:

• You don’t own your car
If you want to own your car, then leasing won’t be the best option for you since you hand the vehicle back at the end of the lease term. That said, if you take out a PCP or HP purchase agreement you may have the option to buy the car outright with a balloon payment at the end of the lease term. This can be a flexible option of anyone who wants a longer opportunity to check if the car is right for them before fully committing to a purchase.

• You have a bad credit rating
Before you’re approved for a lease, you will need to pass all the usual credit checks. If there’s a problem with your credit rating, it may mean that you won’t be able to lease a car, or it may just make the process more difficult.

• Cashflow problems
The lease arrangement depends on you being able to make fixed monthly payments for the entire lease term. If your cashflow is unpredictable or you simply cannot afford to make the payments, then leasing may not be an option for you. This is an important considerations since leasing contracts are for a fixed period and difficult to get out of.

Which is cheaper – leasing or buying?

So how can you work out if it makes financial sense to lease or buy your next new car? Well, the calculation is all about depreciation. If, at the end of a 3-year lease, the depreciation of the vehicle is high, you would be better off leasing it rather than owning it.

A recent Which? survey looked at specific car models and discovered that, after 3 years, a VW Scirocco was worth 63% of its original price, while a Ford Mondeo had depreciated to 36% of its original value. The conclusion was that most people would be better off buying the Scirocco but leasing the Mondeo.

Before deciding whether to lease or buy your next car, it pays to do a bit of background research yourself. See Here’s how:

• Compare the total amount payable on a lease versus the total amount payable on a purchased finance option

• Get a good idea of the resale value of your car by checking second hand car websites

• Take the total amount payable for the purchased finance option and divide it by the resale value, then multiply by 100 to get the percentage depreciation.

• Finally, deducted this percentage from the total amount payable. If the resulting amount is higher than the lease price over the same period, then leasing is your best bet.

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