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How Does Car Leasing Work?

Is car leasing, also known as PCH, right for you? In this guide, Auto Trader explores how leasing works, how payments work, how PCH and PCP compare, and answer your FAQs.

Auto Trader

Words by: Auto Trader

Last updated on 14 April 2023 | 0 min read

Leasing can feel a little complicated though, so we’ve put together a helpful guide to explain everything you need to know about how car leasing works.
Jump to: • What is a car lease?How is car leasing different from PCP?What’s included with car leasing?Benefits of leasing a carDisadvantages of leasing a carWhat credit score is needed to lease a car? •. How are monthly leasing costs calculated?Do I need insurance for a leased car?How do I lease a car?What happens at the end of a car lease?FAQs

What is car leasing?

Car leasing is a form of long-term car rental. When leasing a car, you make regular monthly payments for a fixed length of time. Once the term of the lease has ended, you return the car to the leasing company. Car leasing is a popular alternative to buying a vehicle. It is particularly common for businesses who want vehicles without the cash outlay.

What is a car lease?

A car lease is a financial agreement that allows you to drive the car you want for a set monthly payment. Leasing is very much like renting, but over a longer period of time. A car lease works in a similar way to renting a house. If you have a lease agreement on a flat or house, you pay your monthly rent and get to live in the property without ever owning it. Similarly, leasing a car means you’ll pay monthly rentals and get to drive the car until your lease is up.
Van leasing is quite similar to leasing a car. If you want to find out more about leasing a van, read our van leasing guide here.

How is car leasing different from PCP?

Leasing, also known as Personal Contract Hire, and PCP or Personal Contract Purchase, are fairly similar in the sense that both agreements mean you pay a monthly fee to drive a vehicle. However, there are a few key differences between the two.
The main difference between PCP and Leasing comes at the end of the agreement. With leasing, you simply hand the vehicle back. With PCP, there are a few alternative options: • You can choose to return the car to the dealership, just like leasing. • You can choose to pay an optional fee to keep the car. This is commonly known as a balloon payment and gives you the option to own the car at the end of the contract. • And the final option with PCP is to trade your current PCP agreement on your vehicle for a new one on a new vehicle. Personal Contract Purchase (PCP) agreements tend to work a little more like loans, so you can see the rate of interest you pay and they may be a bit more expensive because they’re worked out on the entire value of your vehicle brand new. Whereas a lease is worked out on how much the vehicle will be worth at the end of your agreement - this is known as the vehicle’s residual value. Although leasing does include interest, it is already included in the monthly payments. You should look for an agreement with low-interest payments if you do opt for PCP. Another difference between PCP and leasing is that leasing agreements tend to be on new vehicles rather than used cars. It is much more common to be able to finance a used car with a PCP agreement. Deciding whether PCP or leasing is best for you all comes down to your personal preference. Each has its pros and cons. If you’re not worried about owning the vehicle and want to pay lower monthly payments, leasing may be the right way to go. Whereas if you want a little more flexibility, PCP could be the one for you.

What’s included with car leasing?

Car leasing comes with additional benefits including:
• Road tax, or VED as it is also known, will be included in your monthly payments for the duration of your lease, so there’s no need to worry about getting your car taxed before you start driving it. • Free delivery is usually included when you lease a brand-new car so you won’t need to worry about the hassle of going to wherever the car is being kept, it will be delivered directly to your driveway. • A manufacturer’s warranty is included on brand-new vehicles. The length of the warranty will be based on the manufacturer of the vehicle but most last for the first 3 years. • Maintenance can often be included as part of your lease as an add-on. Most car leasing brokers will give you the option of adding maintenance to your plan so you can add this to your monthly payments for extra peace of mind.

Benefits of leasing a car

There are many benefits to leasing a car. Here are some of the top ones:
• Overall, leasing tends to be one of the most affordable ways to drive a brand-new car. As you won’t have to pay a large upfront payment, you won’t have to worry about saving up for the whole value of the car. You can also adjust your monthly payments to suit you by choosing how long you want your lease to last and how many miles you’re likely to drive each year. Leasing also tends to mean lower initial payments than other financial products that may come with a large deposit. • One of the best things about leasing is that it’s an easy and hassle-free way to drive a new car. Your monthly payments are set and stay the same for the duration of your lease, so there’s no need to worry about changing budgets, and you simply hand back the car at the end of your contract. • With leasing, there are a range of added benefits. You’re driving a new car so you don’t have to worry about an MOT for the first few years of the vehicle’s life. Your car will also be covered by a manufacturer's warranty for at least the first 3 years too and road tax will be included with your lease. • Leasing a new car makes it a lot less likely that something will go wrong with it, unlike when you get a used car and you don’t know how much care the last owner took of the vehicle. • Most of the time you can add a maintenance package with leasing which tends to make the costs of maintenance more manageable and, again, hassle-free.

Disadvantages of leasing a car

Whilst leasing is a great option, there are also a few disadvantages that come with it.
• The major disadvantage for many people is that with leasing you will never own the vehicle. If you like the idea of owning your car, this is not possible on a lease and it will need to be handed back at the end of your agreement. • Leasing a car gives you less flexibility than other products, so, if you do decide you want to give the car back early, this tends to be difficult and expensive. If you don’t want to sign up to a set commitment, leasing may not be the way to go. • Leasing is also not usually offered on used cars, so if you’re looking for a cheaper model and don’t want to drive a new car, leasing is probably not right for you.

What credit score is needed to lease a car?

Leasing is a financial product and therefore you will be credit checked before you’re able to take out a lease agreement. This is to ensure you’re able to afford the monthly payments on your lease and won’t suffer any undue financial hardship as a result of deciding to take on a lease.
There is no set credit score you will need, as all the funders will be looking at different scores, so it very much depends on the agreement, but you can expect to need a good credit score to be able to lease a car. If you have bad credit, you may not be able to lease a car but there are options available to you.

How are monthly leasing costs calculated?

Monthly leasing costs are calculated based on a number of factors. Obviously, the overall price of the vehicle will be considered - so the more expensive the list price of the car, the more expensive your monthly payments are likely to be. However, lease payments are based on how much the vehicle will be worth at the end of your agreement, so you only pay for what you use. But there are other factors too, including how long you’d like to drive the car for and how many miles you’re likely to drive per year in that time. This information allows the funder to calculate the likely depreciation of the vehicle in that time.
The other major factor taken into account will be how much you want to put down as an initial payment. Often, the more you put down initially, the lower your monthly payments will be. Once you have input all of this information, it will be used to quickly calculate how much it will cost to drive your new car each month.

Do I need insurance for a leased car?

Yes, you will need to insure a leased car in the same way you would insure a car you purchase.
With leased vehicles, in almost all cases you will need to make sure you have fully comprehensive insurance rather than just third-party, and you will need to arrange for the insurance to begin on the day your car is due to be delivered. The only major difference is that on the documentation the ‘owner’ of the car will usually need to have the funder listed rather than you.

How do I lease a car?

You can lease a car online and get the car delivered directly to your door. Leasing a car is a really simple process, you’ll just need to choose the car you want and have a few details for the application.

What happens at the end of a car lease?

At the end of the car lease, you will simply hand the vehicle back. The process for this is very simple. Once your lease is nearing its end, you will be contacted to arrange a time that suits you for someone to come and collect the car. The car will be checked for fair wear and tear and then taken back by the funder. After this, you’re free to choose a new car on a new lease.
For more information, you can read our guide to what happens at the end of a car lease.

FAQs on how car leasing works

Who is the registered owner?

When you lease a car, directly or through a broker, the finance company providing the lease agreement is the registered owner at all times. Although you’ll be responsible for the car when it is in your care, you will not be the legal owner.

Are maintenance costs included?

Maintenance costs are not included as part of your lease deal. Often a maintenance and service package can be added as an optional extra. As you will be responsible for the maintenance of your car during the lease, including regular servicing, it is often helpful to include in your contract.

Who will deliver the car?

Once your lease is approved you’ll be contacted by our team to arrange a delivery date and time that suits you. Once your car is ready, delivery is free and you’ll just need to sign the provided documentation to take responsibility for the car.

How do I pay for the car?

To pay for the car, you will need to set up a monthly direct debit. The initial payment amount will be whatever you have agreed as part of your lease and will usually be taken 7-10 days after delivery of your car. Monthly payments will then begin the following month and remain the same for the duration of your lease.

What do I do about road tax and MOTS?

Road tax is included in your monthly payments for the duration of your lease agreement as standard, and because your lease car will be brand new it won’t need an MOT for the first 3 years of its life.

Is roadside assistance included?

This depends on your lease agreement. Many manufacturers provide between one and three years of roadside assistance for free, but always check the details of your lease. Sometimes no roadside assistance is offered and you will need to sort this out yourself with a provider.

Is my car under warranty?

The majority of new cars will come with a manufacturer warranty as standard. The most common length of manufacturer warranty is 3 years from the date the vehicle was first registered. Electric cars will often come with additional separate warranties just for the battery packs.

What happens if I exceed my mileage?

When you customise your lease contract you’ll need to choose the amount of miles you expect to drive each year, also known as your annual mileage. If you drive more than the agreed amount of miles in your contract you’ll have to pay a charge for any excess mileage. This charge is calculated on a pence-per-mile basis, with the specific cost outlined in your agreement.

Can I keep the car longer than my lease contract?

Usually, you will not be able to extend your lease beyond the duration agreed in your contract, however, you can always contact our team to see if an extension is possible.

Can I buy the car after my lease ends?

With personal contract hire (PCH) there is no option to buy the car at the end of the lease agreement, you simply hand it back to the finance company. There is a form of finance known as personal contract purchase (PCP), where owning the car is an option at the end of the lease but involves paying a balloon payment.

Can I end my lease agreement early?

Ending your agreement early is known as early termination or voluntary termination. Ending your lease and payments early is always done at the lease provider’s discretion and it often incurs a charge. This charge is often calculated as around 50% of your remaining rental payments, but it can vary by finance company.

Are lease cars always brand-new?

When you lease a car it will always be brand new, so you can drive the most up-to-date models in pristine condition.

What is the shortest car leasing contract?

The shortest car lease available is 12 months, with 48 months being the longest duration available.

Can I lease electric cars?

Yes! You can drive the latest and most innovative vehicles on the market with fixed monthly payments when you lease an electric car.

Why would my lease car be pre-registered?

Sometimes cars may be pre-registered when you lease them. This means that they have a registration plate issued and the finance company or dealer is already the named owner on any documentation. This is often done by finance companies to get hold of the most popular models and colours from manufacturers. Although the car may not have the newest plate available, the car itself will be brand new when delivered to a leasing customer. Find out more about leasing, how it works and whether it is right for you in our comprehensive car leasing guides. If you're ready to find your next car, take a look at our latest car leasing deals.