How does leasing a car work? There are many forms of leasing a car, either business use (commercial), or for the man in the street (consumer).
How does leasing a car work? Commercial use
For business uses, a single lease can be had through business car leasing, of which the types can be seen further below in the article.
If you are a business, you can lease a fleet of cars and have a relationship with a lessor who will maintain those cars for you and give you a group price for the fleet and maintenance.
How does leasing a car work? Consumer
If you are a consumer, then there are several different types of car finance.
There are a total of 8.2 million cars financed on credit in the UK as of 2018, with over 2 million cars financed on car credit alone in 2017.
In the UK, car credit is the third biggest credit market after mortgages and credit cards.
There are several forms of car credit, which operate differently and allow the consumer access to the asset.
How does leasing a car work? PCP
Personal Contract Plan, (PCP) allows drivers to make an initial down payment then pay monthly across a three or five year period.
Before the contract starts, a guaranteed future value is placed on the car, which includes depreciation. Monthly instalments pay off the depreciation of the car, and not its entire value, over the course of the term.
At the end of this time a final payment, known as a balloon payment, is made to secure the equity in the vehicle.
How does leasing a car work? (HP)
Hire Purchase (HP) involves the payment of a deposit and monthly instalments across the hire agreement until the entire value of the car is paid off. This means ownership transfers to the lessee.
It does not require the lessee to estimate mileage at the start of the hire purchase agreement, so there are no excess mileage charges.
Monthly payments may be higher than some other finance options, such as PCP, as you’re paying off the full value of the car.
Selling the car requires settling the finance, while repayments must be fully completed to acquire ownership.
How does leasing a car work? Personal Contract Hire (PCH)
Personal Contract Hire (PCH) is a long-term rental that does not result in ownership of the asset. Lessees are required to keep the same car over the agreement. The time of the lease is fixed, as are the monthly payments.
Personal Loan (PL)
Personal loans can also be used to fund a car but are not directly seen as car credit. As a result the terms of repayment of the loan can vary across the loan period. If there is an accident or you sell the vehicle you still need to pay the loan back.