Car leasing explained

Leasing allows you to use a car for a set amount of time, covered by monthly payments. This is a useful form of car finance if you know that you don’t want to own the vehicle at the end.

Think of it as a long-term rental. You’ll agree with the lessor upon a deposit, the lease term, mileage limits and monthly payments. After the period is up, you’ll return the car. The deposit and monthly payments are often cheaper than other forms of finance which means you can sometimes afford a nicer car.

However, it’s important to remember that at no point do you own the vehicle and you will be expected to stick to agreed mileage limits and return it in good condition.

How leasing works

Once you have picked the car you want to drive, you’ll need to find the provider of your lease. This might be a dealership, although they don’t all offer leases, or you could find an online broker. Even if you’re going with a dealer, it’s worth comparing options online to give yourself a benchmark.

You’ll then need to confirm the deposit, monthly payments, the term length of the lease and mileage limits. It’s important you don’t underestimate these limits. If you go over the agreed mileage when you return the car, you’ll likely be charged.

How are leasing costs calculated?

Your payments will be based on a number of factors: the value of the car, the length of your lease, your agreed mileage (the more miles, the more it will cost) and the amount the car will lose value over the term of your lease.

Of course, it’s vital that you review the payment plan you’re signing up to. You need to be certain you’ll be able to keep up with the payments agreed to. If you fall behind, you may be charged extra, have the car repossessed and negatively impact your credit score.

Business contract hire vs personal contract hire

Two of the most common forms of car leasing are personal contract hire (PCH) and business contract hire (BCH). PCH is when an individual takes out a lease on a car. BCH involves a vehicle being leased through a VAT registered company. This can range from a multinational to a man with a van.

The two options work in much the same way: a vehicle leased over a set period of time after a deposit, covered by monthly payments. However, leasing through a business means you can reclaim some VAT. But remember, this only applies to miles driven for business purposes.

The benefits of leasing

  • Flexibility over lease length and mileage
  • Smaller deposit than other forms of car finance
  • Lower monthly payments than other forms of car finance
  • No interest payments
  • Road tax and breakdown cover can be included in monthly payments

The drawbacks of leasing

  • Mileage limits
  • Car must be kept in good condition
  • You do not, and will not, own the car

Does car leasing require a credit check?

Your lender will most likely run a credit check against you. If you’d like to know how lenders may be viewing you, check your Experian Credit Score for free.

Does car leasing affect credit score?

Yes, for good and for bad. If you stick to the terms of the lease and make all payments on time, this could have a positive impact on your score. But, if you go into default, your score could fall, making it harder or more expensive if you want to finance a vehicle in future.

Is it better to buy or lease a car?

This is completely down to personal preference. If you want a low deposit, low monthly payments and don’t want to own the car at the end, leasing could be the option for you. But if you really want to end up with a car that’s yours, and that you could sell on in the future, another financing option – such as hire purchase – may be more suitable. It's important to be aware that with hire purchase and PCP deals the loan is secured against the car. This means if you fail to keep up with the repayments, you could lose the vehicle.

For other options, read our guide on the different types of car finance. Whichever way you choose to spread the cost of your new wheels, it’s a good idea to check your credit score and report. You’re more likely to get offered more favourable rates the better your score is, so it’s worth getting your credit score in shape before making any applications to help secure the best deals. Read our guide to get tips on how to improve your score.