If you’ve been looking to fund the purchase of a new car through some sort of car finance package, then you’ve probably seen car leasing as an option. What you may not know is how car leasing works. So we’ve put together a short guide to explain to you just what car leasing is and what advantages and disadvantages there are for this type of finance product. Here’s the Creditplus guide to car leasing pros and cons.
In many ways, car leasing is like a long-term car hire. You don’t own the vehicle, just rent it for the length of the agreement. In many car leasing deals, you pay a lump sum or deposit upfront, followed by a series of monthly payments, depending on how long you want to lease the vehicle for.
The amount you pay is usually based on the depreciation in the car’s value. To put it simply, you amount you pay is equal to how much value the car loses across the agreement. To give you an example, let’s say you are leasing a car that is worth £20,000 over four years. Based on market analysis, it’s assessed that the car will be worth £16,000 at the end of the agreement. That means the total depreciation is £4,000, so that’s what you would be charged to lease the vehicle.
One of the key things that car leasing gives you is flexibility. Instead of paying a large amount of money to own a single car, you can change your car more often without having to pay that lump sum. So you can lease one car for three years, then change to a newer model and start a new car leasing deal.
This flexibility also means you can take better advantage of new makes and models when they hit the market. If you are leasing new or nearly new cars, then you will always have a car that is less than a few years old. As engine, safety and entertainment technology improves, you will be able to get the full benefit. The car you lease, especially if it’s a new model, will be covered by the manufacturer warranty for the duration of the leasing agreement, saving you on expensive maintenance and repair work. Buying a brand new car may be out of your price range, but leasing it may make it an affordable option.
Car leasing can also be cheaper on a month-by-month basis, especially if you find the right model that doesn’t suffer too badly from depreciation. Instead of spreading the cost of a full car over your finance term, you just spread the depreciation.
One of the major drawbacks for some consumers is that you don’t own the car at the end of the agreement. If you want to change your car often, this is not an issue. But you may feel like you are investing a lot of money into something that you will not retain any equity in. By that, we mean you cannot sell the car and recoup the money you have invested. While there may be an option to purchase the car you are leasing at the end of the agreement, the amount you have invested will not be a factor in the price.
Another potential issue with new or nearly new cars is that they can suffer from a large amount of depreciation in the early years, so if you want to find the best deals, you will be limited to cars that suffer the least amount of depreciation.
So which is right for me?
Whichever option you choose, you will need to work out what your monthly budget is and what your plans are in a few years time. Sit down and make a plan. Car leasing can be a great option. Just make sure it suits your needs, now and in a few years time.