Leasing Explained

When you lease a car, you are effectively renting another person's property over a set duration (term). As long as you make the agreed payments, you will have exclusive use of the vehicle over this term, but the car will remain the property of the leasing company.

Creditplus Definition of Leasing

Typically a leasing agreement can be split into two stages. The first stage is the leasing of the vehicle. This is where the monthly rentals are paid throughout the term of the agreement. At this stage the car is still owned by the car leasing company. The second stage is optional and will only be applied to certain types of leasing agreements. This is where an individual or business decides they want to take ownership of the vehicle. In order to do this a balloon payment or final payment has to be made to cover the residual value of the vehicle.

If you opt against paying the final payment, the car is handed back to the leasing company at the end of the agreement. Some types of leasing agreement will require you to purchase the vehicle at the end of agreement so it is important that you fully understand the leasing agreement before you sign it.

When you choose to lease a vehicle, you will usually pay an initial upfront payment (similar to a deposit ) for the first month and then start paying the monthly rentals the following month. The upfront payment is usually the sum amount of 3 or 6 monthly payments, but this can changed to either a fixed amount or another number of payments.

For Example: On a 3 year / 36 month agreement you will pay an upfront payment and then 35 monthly rentals. If the monthly payment was £200 and you chose to pay ‘3 upfront’ then you will need to pay a deposit of £600, followed by 35 x £200 payments.

If you choose to pay ‘6 upfront’ then your monthly payments will reduce as you have placed a larger deposit into the deal. It's important to remember that this deposit will not be refunded at the end of the agreement. It is counted as the first leasing payment.

The upfront payment will typically be a multiple of the monthly rental price and when you see quotes for certain leasing products they are likely to be quoted as: 3+35, 6+35 (3 or 6 months upfront on a 3 or 4 year deal) or 3+47, 6+47 (3 or 6 months upfront on a 3 or 4 year deal).

Leasing is clearly different from car finance, which is the more traditional method of funding a vehicle that consumers have often used. With car finance you are given a loan for the whole value of the car and you repay the loan and the interest over the lifetime of the agreement.

The other major difference is that when you buy a car using car finance, you own the car throughout the loan period and once the loan has been repaid.

If you require any further clarification, please get in touch with our expert team.

 

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