Why Lease a Car Instead of Buying One? Essential Guide
In recent years, car leasing has seen a significant rise in consumers. Research sources show that in 2019, the leasing market grew by 14%. But why is leasing starting to get an edge in the battle of leasing vs buying? There’s no one simple answer. From the all-important money factor to more subtle benefits, there are excellent reasons as to why car buyers are becoming car leasers.
How Does Leasing a Car Work?
Car leasing is a very simple practice.
Through a series of calculations that take into account factors like value of the car, mileage, down payments, length of contract and resell purchase price, lease companies offer you a monthly payment plan that allows you to effectively “rent” a car over a set period. During this time, you are the person who has access to the car. You take it home, drive it where you want, and effectively call it your own. However, at the end of the contract, you return the car to the leasing car dealership. Leasing is short-term ownership, where customers pay monthly instalments to use a new vehicle.
It works in a similar way to car rental, except it's a longer commitment. You may rent a car for a week or two, but with leases, you usually agree to a contract term of around three years. The minimum term is one year, and often the maximum is six years. Some lease companies also offer you the chance to buy the car upon completion of the lease contract, but this is an optional extra.
Should You Lease a Car Instead of Buying? The Benefits of Leasing a Car
People often compare the “lease or buy” decision to the “rent or buy” decision of a house. The idea essentially is that for many, if you can buy, you should, because it's an investment that pays off where a rental is a short-term solution or one made necessary by the high cost of the initial ownership. The “lease or buy” comparison, however, is just not accurate. Leasing a car is not simply a way to pay for a car every month because you can't afford to buy. There are many reasons why you should lease a car instead of buying one, even if you can afford to buy it outright.
Save on Depreciation
Depreciation is the process of losing value from an item. Over time, some items increase in value, but many more lose their worth. This loss is often because new and better products becoming available, as well as wear and tear on the product, making it lose its original characteristics. For example, technology depreciates fast. With batteries failing, screens cracking, and a new model launched every year, you'll find your £1000 mobile phone worth significantly less when it comes time to sell and replace.
Yet few items depreciate faster than cars.
According to the AA, a brand new car will lose 60% of its total value over three years. That means if you buy a £40,000 Ford Mustang, by the time the three years is up, it will be worth £16,000. At Kardi Leasing, you can lease a brand new Ford Mustang for £430 per month. Over three years of payments, plus the upfront cost, that equates to a saving of £4000 compared to buying outright and selling after depreciation.
Because of the massive losses accrued buying a new car, the AA actually recommends leasing a car as a way of reducing costs.
Cheaper Monthly Payment Plans Than a Purchase Loan
A study run by highly-reputable consumer goods analyst website, Consumer Reports, determined that the cost of leasing a vehicle over purchasing a car using a financing loan is considerably less. Lower monthly payments combined with reduced interest rates made leased cars much more affordable. The upfront payment — or down payment — was also the same on average. The data collected by Consumer Reports shows a leased car will cost you 27% less over three years than if you were to buy the same car on finance.
Purchase loans are a popular choice amongst individuals who cannot afford the cost of buying a car outright. However, for this market, it is clear that the lower monthly payments on leased cars offer a superior alternative to investing in a purchase loan. While some may argue that you can sell the purchased car after use, the major losses due to depreciation as highlighted above, combined with the 27% savings, mean there is unlikely to be a financial benefit to buying a car over leasing — even long term.
New Car Every Few Years
The length of ownership of a car is decreasing. Owners are upgrading their models more regularly in favour of new features, better economics and rapidly evolving designs. The option to upgrade is one of the major benefits of leasing over buying. When you lease a car, you agree to a set contract term of monthly payments — often three or four years. Once you reach the end of the lease, you can then access a new car instead of being saddled with an old one. That means you can drive away in a new car every few years.
You're always up-to-date with the latest model when it comes to leasing. You don't have to put up with outdated vehicles or worry about the inevitable inefficiency and reliability problems that come hand-in-hand with ageing cars. Leasing provides flexibility in the car ownership experience. You aren't tied to a particular set of wheels for too long, and when you want to replace your car, there is no hassle.
Car Maintenance and Road Tax Is Covered
When you lease a car, it is still the property of the lease company — very much like a house rental. You have to deal with your own car insurance, as that covers you as an individual, but other than auto insurance, all other standard costs are covered under your contract. This is true in most cases, anyway. Always read the fine print and ask questions if you are unsure of coverage.
One of the biggest benefits to both buyer and lease company is the new car is under manufacturer lease car warranty — often for the full term of use. That means any problems are rectified without charge by manufacturers. You can take the car directly to the local dealer to have them sort it. Repair bills and costs for things like servicing are covered either by warranty or the lease company. Road taxes are included as well, and MOT coverage is usually part of the conditions of your contract, too.
Almost everything is paid for as part of your lease. With factory warranty covering repair costs, and the lease company worrying about upkeep, all you need to think about is fuel and optional extras like gap insurance.
Boost to Your Credit Score
Whether you lease or buy through car loan payments, you can see a benefit to your credit score if you maintain payments. When you buy or lease through monthly finance, you commit to regular payments. Make those payments, and your credit score improves, which means your credit record becomes a more valuable personal asset. A healthy credit rating can be helpful for everything from securing a mortgage to applying for credit cards and even more expensive car lease options or other finance options in the future. It's a small added advantage, but still worth taking note of.
Buying vs Leasing: Are There Any Downsides to Leasing a Car?
When it comes to the disadvantages of leasing new cars, there are only a few terms and expenses that may be of concern. These are also not really disadvantages but are simply things you must be aware of and accommodate when adapting to the car leasing lifestyle. So what are the potential cons of a lease contract, and how can someone avoid them?
Restrictions on Mileage
When you work with a leasing company, you'll receive a mileage limit. This is because the mileage will affect the value of the vehicle once you return it and the leasing business sells the car on. Mileage is a big factor in car depreciation. The more mileage you use, the more the lease will cost to cover the loss of value. Mileage is agreed upon at the start of your lease and can be changed if necessary. However, if you go over agreed mileage without consulting the leasing company, you could face extra costs. No one wants this, and it isn't a risk either — providing you understand the contract hire terms and stay aware of your mileage penalty. Think about how many miles you need before agreeing to a lease deal and if circumstances change, adjust your lease payments to match. All you have to do is make sure you don't breach your contract terms, and you won't see any extra fees and can fully enjoy the advantages of leasing.
Damage to a car effects car value. The resale value of a car is directly influenced by wear on parts and scratches to elements like body, paintwork or a window. The condition of the car is important to its price, and some lease contracts may not cover wear-and-tear. The important thing here is to be aware of what your contract covers and what it doesn’t. Understand what costs you incur and penalties you have liability for if the vehicle is damaged. Take care of the vehicle and the chances of you having to take responsibility for any damage is low. However, we still recommend you budget for these as you would with traditional car ownership.
For most, this isn't a heavy consideration, but it does matter to some. With a lease agreement, you cannot modify the car or add extras like new exhausts or interiors. The car must remain as standard. This is certainly one area where it may be better to buy a car than to lease if modification is important to you. If you aren't happy with how the manufacturer has designed the car, and want to make changes, car buying does provide an opportunity that lease deals do not.
Costs for Early Termination
As with any contract involving money, when you agree to lease a car, you sign up for financing costs for a set term. At Kardi Leasing, we are regulated by the Financial Conduct Authority, which means all lease payment plans are legal and fair for the consumer. However, you must pay the monthly cost you agree to. If circumstances change and you need to terminate your car payments, there are options available to do so. In this situation, excess charges will often apply. If you have concerns about this, our advice is to discuss them with us first. We want to find the best lease term for you so that you can enjoy peace of mind and financial security. There may be ways we can help, and leases we can offer more suited to your needs. If you think there is a possibility you may have to terminate your contract early, talk to us before you lease the car you want, so we can find the right lease repayments deal for your situation.
Get fantastic car lease deals in the UK on a range of vehicles — from BMW and Ford to Honda and Toyota, Kardi Leasing has an extensive range of brand new cars. With options to suit all budgets, including hatchbacks, estates and even high-end sports cars, there is something for everyone.