What is car leasing? Car leasing explained

Leasing – where you effectively agree a long-term rental of a car – is one of the cheapest ways to get into a brand-new car

BuyaCar team
Jan 17, 2022

If you want a simple, low-cost way to get behind the wheel of a brand-new car, a lease deal could be a good way to go.

It provides one of the lowest rates of monthly payment (though in certain circumstances PCP finance options can prove cheaper) and is an uncomplicated way to pay for the use of a brand-new car. If you're looking for a used car, there are some leasing options available to you, alongside great value finance deals.

As a basic concept, Leasing – known as Personal Contract Hire or PCH – is really nothing more complicated than the long-term rental of a car. All you do is pay an initial fee (usually equivalent to several monthly payments) then a series of fixed payments over an agreed period of time – there’s nothing more to it.

At the end of the term of your lease, you hand the car back, and there is no option to buy it. Part of a lease agreement will include a mileage limit. Generally speaking, the higher the mileage you expect to do, the more expensive the lease, as higher-mile cars are worth less to the leasing company when they get them back. If you do go over this, you'll be charged a fee for every extra mile you cover. This is usually around 5-10p per mile, though with rare cars or some sports cars this could be as much as 30p or more. You’ll also need to return the car with nothing more than fair wear and tear or face extra charges.

While private individuals can take out PCH (Personal Contract Hire) leasing agreements, for businesses, sole traders and partnerships there are commercial leasing products available (which features prices without VAT). Leasing is available for cars, vans, and even taxis, but is typically restricted to new vehicles. The vehicle always remains the property of the leasing company.

If you are considering purchasing the vehicle at the end of the agreement, but haven’t decided yet, it may be worth considering a PCP (Personal Contract Purchase) agreement. At the end of a PCP agreement, you have the option of buying the vehicle, although monthly payments are typically a little higher, like-for-like, than with a lease.

Find out whether PCH leasing is for you by watching our video guide below:

Car leasing pros

Low, fixed payments for the latest cars
You’re not liable for any unexpected drop in car’s value
Easy to regularly upgrade to a new car

Car leasing cons

Mainly limited to new cars
Damage and excess mileage charges apply
There’s no option to own the car

Car leasing - how it works

  1. Choose your car and pay an initial rental fee, which is usually the equivalent of three, six or nine months of payments.
  2. Your car is delivered and you’ll make fixed monthly payments for the rest of the agreement.
  3. Return the car at the end. If you’ve exceeded the agreed mileage, or the car has excessive damage, you’ll be charged more.

Cheapest car leasing deals

There’s some flexibility in lease agreements, so they can be tailored to suit your needs:

  • If you’re looking for the lowest possible monthly price, then you can reduce the mileage limit. The car will be worth more at the end if it has covered fewer miles, so leasing firms will charge you less.
  • Changing the length of the agreement will also affect the amount that you pay, but this will depend on the vehicle and how quickly it loses value. In some cases, you’ll pay less each month for a longer, four-year agreement, (although you’ll be paying more overall). In others, the cheapest option is the shortest one - typically two years.
  • Agreeing to make a larger initial payment will also reduce the monthly cost.

As with other types of finance, the cheapest lease deals are available on the least expensive cars and the ones that lose their value slowly.

Cancelling a car leasing agreement early

It may be possible to return your leased car early and end your agreement by paying a settlement fee but this isn’t guaranteed. In some cases, you may even be asked to make all of your remaining monthly payments before you’ll be released from the contract.

This does mean that it's even more important to ensure that payments are affordable before you start. However, leasing firms do know that circumstances sometimes change unavoidably, so it's important to get in touch with them if your payments suddenly become unmanageable.

Car leasing: extra charges

After up to four years of driving, your leasing company won’t expect the car to be returned in the brand new, sparkling condition that it arrived in: stone chips and small scratches are expected.

These are assessed according to industry guidelines set out by the British Vehicle Rental and Leasing Association (BVRLA). These state, for example, that small scratches up to 25mm are usually acceptable, providing that they don’t go down to the base layer of the paint. Full details of acceptable defects will be available from your leasing company.

You’ll also be liable for extra charges if you drive beyond your mileage allowance, as higher-mileage cars are generally worth less. It’s common to pay for every mile you go over the limit.


Read more about:

Latest jargon busters

  1. What is regenerative braking?

  2. What is VED (Vehicle Excise Duty)?

  3. Tesla Dog Mode: what is it and which cars have it?