Car leasing explained: What is car leasing and how does it work?
At Zero Deposit Leasing, we want to get you behind the wheel of your new car quickly and without any fuss, which is why we provide this helpful car leasing guide. You’ll know what leasing is, whether car leasing is for you and how the process works.
Here’s what we’re going to run through:
- What is car leasing?
- How does car leasing work?
- Pros and cons of car leasing
- Who can lease a car?
- Different types of car leasing
- What to do before leasing a car
- Factors to consider before you lease your car
- Leasing when you’ve suffered financial difficulties
- Can I get a car and lease deal from the same company?
What is car leasing?
Car leasing is a simple way to rent a car over a set period while paying a monthly amount to cover the cost of depreciation. At the end of the lease, you either have the option to keep or return the car, depending on what type of lease contract you have.
How does car leasing work?
There are two ways to lease a car; you can either get the finance and car separately or together.
Separate – you can either use a car finance specialist, a bank or other forms of credit to finance your car; all you need to do is get your finance in place and then find your vehicle.
Together – dealers usually work with a panel of lenders* who approve your finance agreement, so you can either find your car or get your finance secured first.
*Different car leasing companies work with different lenders. For example, Zero Deposit Leasing work with specialist bad credit and no deposit lenders to help people with financial difficulties get car lease deals.
Pros and cons of car leasing
Pros of car leasing
- Because you’re renting the car, you’re only covering depreciation, which means monthly payments are lower.
- Because monthly payments are lower, you’ll have access to cars you wouldn’t usually be able to drive.
- There isn’t any pressure to buy the car at the end of the lease.
- The manufacturer’s warranty covers new cars, which usually lasts the duration of the lease.
- Leasing a car is a quick process, as online applications and car delivery are becoming normal.
- Avoid the expense of looking after an ageing car.
Cons of car leasing
- If you buy a car, you’re investing. Leasing is like renting a house; you’re paying for the use of the house, but you won’t have anything to show for it and the end of the agreement.
- If you damage the car or exceed your agreed mileage limit, you’ll be liable to pay any charges.
- You can’t make any changes to the car unless you can hand it back in its original condition.
- You’ll have to pay if you want to end the lease early, but this is the same as most finance contracts.
Further reading: What are the pros and cons of car leasing?
Who can lease a car?
As long as you’re over 18, you can lease a car. We help everyone, such as:
- Bad credit customers or people with financial problems
- Families, students and the elderly
- Businesses and personal leasers
- People who are employed, part-time employed or unemployed
Whether you should lease a car depends on your lifestyle and financial circumstances, we’ll talk more about what to consider before you lease a car in a minute.
Different types of car leasing
There are various options open to you when you lease a car, which differs through ownership and what happens at the end of your lease agreement. Familiarise yourself with the following lease types and see which one you prefer.
Personal contract hire (PCH)
Personal contract hire is a popular lease option, and it works because it’s simple. Pick your car and arrange your finance, pay a deposit if you have one and drive away. Stick to your monthly payment and return the car when your contract ends. You won’t have an option to own the vehicle.
Pros: you don’t need to worry about depreciation; you won’t experience negative equity as you don’t have to dispose of the car; get a more superior vehicle for less money, you don’t own the vehicle; so the owner has to pay tax.
Cons: you don’t own the vehicle so you’ll never have the asset.
Further reading: What is personal contract hire and how does it work?
Personal contract purchase (PCP)
Personal contract purchase offers the same structure as personal contract hire, but you have the option to buy or return the vehicle at the end of your contract period. So, owning a car is an option.
Pros: more flexible than other agreements; you agree on the balloon payment amount at the start of the contract; you can hand the car back.
Cons: tends to be more expensive than PCH; interest rates tend to be higher than HP; you’re responsible for car tax.
Further reading: What is personal contract purchase and how does it work?
Lease purchase (LP)
Again, lease purchase has the same structure to the agreement, but you have to pay the balloon payment at the end of your contract. It limits your options, but you can save money if you pay off your car early. Differs from PCP in the fact that the balloon payment is compulsory.
Pros: lower payments mean you can balance budgets in other areas of your life; you know you’re going to own the vehicle.
Cons: if you don’t save enough money, you’ll end up in financial trouble; the balloon payment may be higher than the residual value.
Further reading: What is lease purchase and how does it work?
Hire purchase (HP)
Hire purchase follows the same structure, but you’re paying to own the car. You won’t have any balloon payments at the end of your contract, and handing back the vehicle isn’t an option.
Pros: you own the vehicle at the end of the agreement; no balloon payments; no VAT to pay on monthly instalments.
Cons: the loan is secured against the car, and the lender can repossess it; you have to figure out what you want to do at the end of the agreement.
Further reading: What is hire purchase and how does it work?
What to do before leasing a car
Before you start the leasing process, you’ll want to ensure you’re confident about arranging your car lease.
Learn the key terms
Leasing jargon can be confusing, so starting the process with a little knowledge can help prevent any confusion or frustration.
Annual mileage – your estimated annual mileage, which will help you determine your yearly mileage agreement.
Lease term – the period of the car lease, which is between 1-5 years. However, short term leases are available.
Balloon payment – an optional lump sum payable at the end of a contract if you wish to own the car.
Broker – acts as a middleman between the buyer and the seller.
Interest rate – the charge of the lender to borrow the money; the better your credit rating, the lower your interest rate.
Cooling off period – you’re entitled to cancel any credit agreement within 14 days without receiving a penalty.
Credit score – what lenders use to judge your ability to pay the loan back.
Soft credit check – determines whether you’re likely to be accepted, with no effect on your credit score. Won’t confirm acceptance/rejection.
Hard credit check – determines whether you’ll be accepted, which impacts your credit score. Will confirm acceptance/rejection.
Depreciation – how much value the car loses over time, so if you take a 2-year lease, we factor the car’s depreciation into the loan amount.
Early termination – when a customer opts to end the agreement early, which will result in a fee from the lender.
Initial rental – a starting payment of up to 50% of the lease value, like a deposit.
Fair wear and tear guide – information on what classes as fair ‘damage’; what the company expects for you to avoid any charges.
Maintenance package – an option for the dealer to include maintenance as part of your deal, such as servicing, repairs or new parts.
GAP insurance – an additional insurance product that helps cover you if your car is written off or stolen, as most insurance company payouts won’t cover the full cost of the lease.
HPI check – a vehicle check that ensures the car is fit to drive and free from any problems; always check your dealer offers an HPI check.
Part exchange – if you already have a vehicle, you can use it as an exchange to reduce the cost of your new lease deal.
5 essential factors to consider before you lease your car
1. Budget – how much have you got to spend on your car per month? Your budget will define what car you can lease, so it’s better to figure this out before starting looking.
2. Credit score – your credit score will help lenders determine how much of a risk you are; if you have a poor credit history, you’ll be more of a risk. However, that doesn’t mean lenders won’t agree to loan you the money.
3. Interest rates – paying 5% interest on a loan is different from paying 12%. For example, paying 5% interest over a two-year loan period of £15,000 gives a total cost of £16,500. The same loan with a 12% interest is £18,600, which is over £2,000 more.
4. Car’s age – a car that’s three years old or more won’t have a manufacturer’s warranty, but older cars will have lower monthly payments. Car leasing tends to be aimed at people who want newer cars.
5. What happens at the end of the agreement – you’ll want to think about what you want to happen when your contract ends, as you don’t want to tie yourself into a deal that doesn’t suit you.
Further reading: Is car leasing worth it?
Leasing when you’ve suffered financial difficulties
Because you’ve suffered financial hardship, it doesn’t mean leasing is unavailable to you.
At Zero Deposit Leasing, we work with specialist lenders who help people with bad credit, IVAs, CCJs, bankruptcy and no deposits lease cars.
While a company should never guarantee whether you’ll get a car, it isn’t impossible. Ask your dealer about bad credit options and see if they can provide you with information about affordability.
Any proper dealer will have your best interests at heart and won’t try to push you into a deal that you can’t afford.
Further reading: How to lease a car when you’ve got bad credit
Can I get a car and lease deal from the same company?
While the car and lease deal won’t be from the same company, you can get them in a convenient package if you shop with a dealer/broker with access to credit lenders.
The main advantage of getting your car and finance package in one place is that you’ll save time; you’ll only have to deal with one party as well.
You won’t be limited in the types of car you can lease either, as most dealers can source vehicles for you – unless they’re a manufacturer-specific garage.
How does car leasing with Zero Deposit Leasing work?
Leasing with us is simple; all you have to do is:
- Search for a car or use our free soft credit check tool to see if you’re preapproved for car finance (no impact on your credit score).
- Liaise with your account manager, who’ll go through the application with you.
- Once we arrange your finance, you can pick your car up from our Blackburn showroom or arrange nationwide delivery.
