When considering the increasingly popular method of leasing, as a way of financing a vehicle, it’s worthwhile understanding how it works financially.

A grasp of the basic principles can help you make an informed decision.

Leasing: unlike other financing methods

Leasing is unlike other financing methods except, to a degree, PCPs (Personal Contract Purchase) in that you never own the car. You are effectively hiring the car on a longer term – usually two to four years – for a monthly sum. At the end of the agreed period you simply give the car back and, if you desire, start another lease with a new car.

PCPs can work in a similar way in that, amongst other options, the car can be given back at the end but they’re really a type of hire purchase.

Adjusting payments

Leasing offers much flexibility in its pricing structure. The monthly amount paid is controlled by five factors:

  • On the road price of the car
  • How much initial rental is paid
  • Length of lease agreement
  • How many miles the car will cover during the agreement
  • Depreciation

On the road price – the higher the price, in broad terms, the higher the monthly rental. For example, leasing an Audi would still work out more cost effective than an Aston Martin, but you’re still driving away with a luxury vehicle.

Naturally the monthly amount increases if you then add optional equipment and maybe a maintenance plan (where routine servicing and maintenance is covered) to the agreement.

How much deposit is paid – a deposit in the form of multiples of the monthly rental is paid at the start of the agreement. The common multiples are three, six or nine times the monthly rental; the lower the deposit the higher the monthly payments and vice-versa.

Length of lease agreement – common leasing terms are two, three or four years; generally the longer the term the lower the monthly rental.

Mileage covered – an annual mileage limit is set at the beginning of the agreement; the lower the mileage, the lower the monthly rental. This is because a car with lower mileage would be worth more used.

Depreciation – ties in to a degree with ‘mileage covered’ above. Leasing rentals are partly geared with the car’s depreciation in mind; lower mileage cars will obviously depreciate less than higher mileage ones so this is reflected in a lower monthly cost.

It’s a key factor in making leasing attractive in that prestige brands with lower depreciation can actually be a more viable option on a lease as monthly rentals will be – relatively speaking – reasonable. Other factors affect depreciation, so lower depreciating cars are attractive propositions when it comes to leasing.

Depreciation doesn’t affect the customer directly in that they don’t have to concern themselves with selling the car at the end of the agreement. The leasing company, however, will be disposing of it one way or the other so depreciation is a key factor in how leasing finances work.

You may find the monthly difference between leasing a prestige branded car and a cheaper, more mainstream brand is less than their respective on the road prices would suggest they might be.

Popular and straightforward

New cars sales have been rising for some time, and many of them are being financed by various methods where ownership often isn’t secured until the very end of the term. Therefore, the idea of being able to run a new car and give it back with no hassle at the end of the agreement as with leasing is proving more and more popular.

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