Car leasing has emerged from relative obscurity to become one of the most popular forms of car finance in the UK in recent years. Despite this growth in popularity, many people are still unsure of what exactly leasing entails and how it works. One of the most frequent questions is: ‘what exactly am I paying for?’
The simple answer to this question is that, when leasing a car, you’re paying (on a monthly basis) for the use of the car over an agreed period – you don’t own the car at any stage of the agreement.
When the lease period is over, you hand back the keys to the leasing company and have the option of choosing a new, replacement vehicle. This arrangement may not suit everyone, but it does offer numerous benefits for people who like flexibility and want to update their car every few years.
Another common question is: ‘how are the monthly payments calculated?’ In order to understand how the figure is worked out, we must first grasp the concept of ‘residual value’. The residual value of a car (when leasing) is the amount of money the car is worth at the end of the leasing period.
This is where one of the main advantages of leasing lies – car leasing is often much more affordable than other car finance options, giving many people the opportunity to drive cars from premium brands such as Audi and BMW that they may not ordinarily be able to afford.
As the residual value of premium cars tends to be above average, this in turn brings down the cost of the monthly repayments, getting you a classier car for less money. The monthly payment is determined when the residual value is subtracted from the retail price of the car when new – this gives the forecasted depreciation of the car over the lease period.
The forecasted depreciation of the car is essentially what the customer pays over the lease period – with an interest charge included by the leasing company. In essence, you give up ownership of the car to a leasing company and cover the cost of depreciation of the car over an agreed period.
Similar to car leasing, contract hire is a popular car finance option for companies that need a fleet of vehicles for business use. Contract hire helps companies to keep their fleets up to date, and also helps them to save time and money on maintenance and resale.
If you’re interested in taking up car leasing to finance your next car, you could make significant savings by shopping around online to compare prices between different car finance companies on your vehicle of choice. In fact, you can also take care of the whole transaction online and have your new car delivered direct to your door – making car leasing one of the most convenient ways to shop for your next set of wheels.
Tags: car finance, car leasing, contract hire, leasing a car