Car leasing can trace its origins to the 1700’s in the USA where horses and wagons began being leased, followed by barges and locomotives in the late 1800’s. In the early 1900’s, Singer began leasing sewing machines which laid the foundations for the product we know today. Despite rental car businesses growing drastically from the 1940’s, and large corporations operating fleets, the consumer market for car leasing however wasn’t commonplace.
In the early 1990’s however, Ford Motor Company introduced personal contract hire and after just a few years vehicle brokers started to appear – buying vehicles at a discount from the manufacturer and leasing them to consumers.
The concept of car leasing (or personal contract hire) is to pay fixed monthly payments, for between 2 and 4 years – in return for driving a brand new car, which you hand back at the end of the term. Effectively making it a long-term rental.
The benefits of car leasing are that you don’t need to worry about the vehicle depreciating, as you don’t own the car. Once you hand the car back – as long as you’ve adhered to the mileage and damage policies – there is nothing left to pay, and the leasing company is responsible for re-selling it. Car leasing also means you can get a new car without the expensive purchase cost, and flexible initial payment options allow you to minimise outlay. Road tax is usually included and as the car is new it won’t require a MOT for the first three years. Maintenance packages are also available with most leasing companies, which include servicing and tyres so, besides insurance and fuel, there is little else to think about.
However, car leasing isn’t for everyone. At the beginning of your contract you will need to estimate how many miles you will do per year. These mileage limits affect the monthly price, so those who drive above-average miles may find leasing to be too expensive. Going over the pre-set mileage limits will also incur charges when you return the car, so providing an accurate estimate is important.
When the contract is over, the car is handed back to the leasing company. There is no option to purchase or extend the agreement. Also, you are responsible for paying the monthly payments for the entire contract. Although early termination can be possible, it could incur potentially hefty fees.
On the whole, car leasing is an effective way to drive a new car every few years, for a reasonable monthly price, but if you’d prefer to own the car at the end or have more choice there are a couple of other finance options.
Hire purchase is a finance product that lets you pay off the car over a set length, often two to five years. The monthly price is inclusive of interest and at the end of the agreement, the car is yours. As the payments are going towards the whole vehicle cost and not just covering the depreciation, hire purchase can be more expensive per month. But as you own the vehicle at the end it can be a good option if you want to keep the car for longer.
There is also no mileage limits or damage policies, as once the final payment is made, the car is yours. Personal contract purchase has similarities to both car leasing and hire purchase. The monthly payments are based on the depreciation of the vehicle and the interest rate, so they are usually similar to car leasing prices.
There are still mileage limits in place and at the end of the agreement, you have three options; return the car to the lender, pay the agreed balloon payment and keep the car, or part – exchange the car towards a new vehicle. Having the option to purchase the car is popular amongst car buyers, however , car leasing still represents the most convenient option if you know that you don’t want to keep the car.