Car leasing: a query for the clever people residing in my computer :)

[fairweathercyclist]

Posting for traffic. I need to replace a 12 year old car and the car I am looking at would be around £13K depending on model and level of newness (ie new new or maybe a few months old).

I was talking to someone yesterday who would like me to lease it instead. When I worked out the numbers it would cost around £9000 for 4 years' use. Whereas if I paid £4000 more, it's mine until eg it's 12 years old and I don't have to worry about mileage or the odd scratch here and there.

Anyway my question is - how does leasing stack up financially and why do so many people do it? I think this came up before a few months ago but I can't find the thread now. I am keen to understand the benefits.

I think part of the answer depends on how long you plan on keeping the car. Do you want a nice new shiny car that you keep for three years and then upgrade to another nice new shiny car?

In that case leasing can make sense.

If you are planning on keeping it for a longer period of time then purchasing it usually makes more sense.

The benefits of leasing? No large upfront payment or having to take out a loan and you get a brand new, shiny car. You can then hand it back after three years and get another brand new, shiny car.

Also, some people are really worried about the costs of maintenance and repairs on older cars and believe that those costs will be more expensive than leasing.

On the other hand, as you say, compared with purchasing a car and keeping that car for ten years then, yes, it is very expensive indeed.

Personally, in your situation, I would look for a car that is one or two years old (they are a lot cheaper than the same car brand new - generally speaking) and purchase that.

If you keep it until it's 12 years old, it probably will cost less, but you're taking a bit of a risk that nothing very major happens in that time like a whole new engine that could be several thousand. Remember that you will have some servicing, MOT and maintenance costs that you wouldn't have in a new car under warranty.

People lease new cars because sometimes it can cost hardly anything more than buying an older car outright, especially very small cars where the amount of depreciation is lower - you're talking about losing £9k in 4 years, when I leased a Citigo, the 4 year depreciation was £5k, and you can get things like servicing, breakdown and interest free credit thrown in by manufacturer incentives, which you would probably have to pay for if you bought outright.

But I agree that for more expensive cars, it is likely to be more expensive, but it's also less hassle, no risk of expensive bills as under warranty, less risk of breakdown at inconvenient moments, many people don't want to keep a car for 12 years and some poeple like having a new car for whatever reason. Not everyone wants or needs to go for the cheapest option.

You need to speak with your accountant to see how it fits with your personal situation. We don’t live in UK but DH and I both lease our cars as it’s worth our while with salary sacrifice packaging/tax stuff on the basis we keep our cars for 4 years before replacing with new ones. However, there is a tipping point for us which I can’t recall now, maybe 7 or 8 years? If we planned to keep a car for that length of time then we are financially better off buying them outright. So guessing it may be similar for you there but def get your accountant to work it out based on your wants.

I would normally agree with nickymanchester's answer but that assumes that we all keep doing the same old same old. We are being guided towards greener solutions - electric cars, public transport - so your next car may not have a 12 year life span. Which choice will be cheaper / easier to get out of?

Be careful about balloon payments (a huge end-of-lease charge). Also the costs of penalties if the car is not in good condition at the end of the lease or has gone over agreed mileage.

Leasing is really bad financially if you're a private user. Main reasons people do it is because they want a much better car than they can afford.

If you'd like a car from quite new to keep for a very long time, look at one side that a couple of years old (and the bulk of the depreciation has happened).

Alternatively, look at Carlow and similar websites as you might be able to get a massive discount on a brand new car (occasionally it can be as much as 20%).

That's Carwow. The massive discounts are available to cash buyers.

I always bought cars outright and ran them into the ground. Which meant most of the time I drove a shitty car that progressively cost me a lot of money.

My last two cars have been leased. My monthly payments are eminently affordable, I never have think about MOTs or servicing. More to the point, I have a car that’s an absolute joy to drive, does 60mpg and is environmentally friendly. I’ll never own a car again.

Car leasing can be really good for a private user! Depending on how you like to keep your cars. If you like to keep and run into the ground, leasing is not for you.
We have leased twice over the past 5 years. The cost of leasing was same/cheaper than the depreciation of the car over the same period, take into account the tax and mot you dont pay for a brand new lease car and it was financially better to have a new lease car.

I leased through work because the price included all servicing/maintenance/tyres and insurance.

Per month it was far cheaper than how much I had to spend/put away to maintain my older car and I was getting to drive something new and reliable.

However the BiK tax changed making it prohibitive. Private leasing agreements don't come close to the same value from what I've seen. You're still responsible for breakdowns, tyres etc unless you pay a massive amount more.

They're also really strict on the handback. I was charged £150 for one small scratch on the inside of the passenger door.

Really crunch your numbers before committing to anything and look over the T&Cs with a fine tooth comb. Some of them tie you to certain garages for servicing etc.

Our current car is a second hand car. It's a bit worrying driving something slightly older, but when the kids spill something on the back seat or open the car door into a bush I'm not wincing at the thought that someone will make me pay for it (beyond natural depreciation).

If you always want to drive a newish car then I think there's not much difference between leasing and owning.

Leasing is more attractive for people with tight finances, even though it's not cheaper, because they can't handle variability in their outgoings. People with deep pockets can take the risk of random large bills that comes with owning, and as a result will on average pay less for their motoring.

I lease my car and will never buy again. I have a brand new RR and it's had quite a lot of issues. Everything is covered when leasing. Potentially it could have cost me a fortune. DH has a company car so we just split my monthly lease for one really nice car.

Worth noting I don't do a lot of miles. My brother leases and has been stung for going over his mileage, it can add up.

There's also the PCP leasing agreement.
You get a not brand new car (typically 6 months to 1 year old, ex hire cars), which is still covered with manufacturer warranty. Monthly payments are less than they would be on a brand new car, and the initial deposit is also much less, and often breakdown cover is included.
We have this arrangement and get a new (ish) car every 18 months. It usually comes with 6 month road tax, also no MOT necessary, and if we get the timing right, we don't have to pay for a service.
Our current car is due road tax (£76 for 6 months) and a service (£130) at the end of this month. We're swapping next weekend so we won't have to pay either, and get 6 months road tax on the new car.

Plus, as PP have mentioned, a newer car can be more economical than an older model.

I’d only say that to need to calculate cost of leasing vs depreciation carefully. For example, car costs 15k and will be worth 10k after 2 years. You lease for 5k for the 2 years thinking it doesn’t make a difference.
However, if you buy outright you can negotiate a hefty discount, eg pay 13k. When you sell for 10, you’re only 3k down. The downside is having tying up the cash in the car to start off with.

Having said that, if you’re happy to buy a car and keep it for years, definitely buy outright.

Dont you just love the amateurs thinking they know best?

Nearly new is usually.a higher monthly.payment than new.

I had a customer look at a demonstrator that was £3000 off list price. Used cars are 9.4% APR, the GMFV is lower because it would be a two owner car at the end. Alternatively a new one had £1500 deposit contribution from the finance company, was 0% and the payment was about £80 a month less.

You cant negotiate a better discount if your paying cash. Cash is a swear word. With deposit contributions like I mentioned above and finance commission being paid to the dealer that they can use to offer more discount, you'll usually get a better deal financing it than paying cash. Ultimately we have the same amount of margin in a car regardless of how you pay for it, but if you've got a PX we can possibly make some money on and the bit of finance commission, we can give you a bit backm

But what do I know? I've only been selling cars for years and am clearly less knowledgeable than someone who has seen Phillip Schofield telling lies on a TV advert.

That ties in with my experience when I took out a PCP. I was looking at paying cash for a 1-2 YO Skoda Citigo, but I ended up doing PCP on a brand new one because due to the no deposit 0% finance, free servicing and breakdown cover it worked out about the same and I wouldn't have to consider an MOT or the car going out of warranty. Didn't make sense to me but the maths didn't lie.

I just managed to not need to replace the original tyres too. It went back at 3 YO having scraped through the MOT on 2 mm of tread.

Two things:
You need to speak with your accountant
Who has an accountant?! Unless you mean the bank....

And @MorningRichie why so bitter? This isn’t a car specialist forum - pp are obviously just sharing their own experiences and opinions.

@MorningRichie yes, you so sound like a bitter car salesman rather than a competent personal finance expert.
Of course, buying at 9.4% APR will be a rip off any day.

And yes, you can get new cars for a lot less going though Carwow or similar. I’ve seen discounts of up to 40% on unpopular estates that were about to be replaced with a new model. That’s an extreme example but up to 20% can often be done.

My reason for leasing was that I couldn't afford any car any other way. I've only been working full time for 3 years and I bought a house a few months before my car died. My savings were shot to the point where the only cars I could afford outright were the same age as the 13yr old car I was getting rid of. So I put down an affordable deposit and I can make the monthly payments no problem. At the end of the 4 years I'll probably get another new because I can use the money I've paid in for the deposit on a new, meaning I'll only ever have to pay the monthly payments which are more affordable in my financial position.

Reasons are different for everyone.

On a point of pedantry (sorry but it's relevant) - PCP isn't a lease.

A lease is effectively like long term rental - there is no balloon payment and no option to buy at the end.

PCP (Personal contract purchase) is the one with balloon payments and the option to buy or hand back.

They are different and have different rules and costs.

Leasing is really bad financially if you're a private user. Main reasons people do it is because they want a much better car than they can afford.

That's utter rubbish. Leasing can be really bad for some private users, and really good for others. As can buying a car outright. There is no set answer, it depends on the individual's circumstances and their requirements.

Any form of car finance is more expensive than paying cash. In general, finding your own cash (bank loan) is going to be cheaper than any deal a car seller offers.

We generally buy nearly new. We find Motorpoint prices are a good guide to a competitive price, We have bought from there a couple of times., but also not from there.

I’d only say that to need to calculate cost of leasing vs depreciation carefully. For example, car costs 15k and will be worth 10k after 2 years. You lease for 5k for the 2 years thinking it doesn’t make a difference.
However, if you buy outright you can negotiate a hefty discount, eg pay 13k. When you sell for 10, you’re only 3k down.

But if a lease company agrees to buy 500 of them, they won't pay £15K, or £13K, but about £8K. The car might even be worth more when they sell it in 3 years than they paid for it. Hence they can offer a hugely competitive lease deal, far less than £5K over 3 years, as all they have to cover is the loss of investment income on their £4m (500 x £8K), or their cost of borrowing it. Then they wait 3 years to make their main profit.

It's a complicated business with lots of variables.

Any form of car finance is more expensive than paying cash.

With bulk buy discounts lease companies can negotiate, especially on models that aren't selling well, that is often untrue. It's quite possible to buy a £20K car that'll be worth £10K in 3 years, but lease it for miles less than £10K over 3 years.

If you plan to change your car after 3 years, leasing is then cheaper than buying for cash.

A lease is effectively like long term rental - there is no balloon payment and no option to buy at the end

You can buy an ex lease car at the end of the term. My work leases cars. At the end of the term they will take the car away, but you can always ask for a price to buy the car. Many people do this and it is effectively the same process as the balloon payment. There might be contractual differences but the 'user experience' and options are effectively the same.

Any form of car finance is more expensive than paying cash

Not true. I was going to pay cash from savings for a Citigo, but they were doing 0% finance (no movement on the price either way) which as well as 0% finance, this also gave free servicing and breakdown cover, which was not available when paying cash.

There would also have been the lost interest on the capital (or interest charged if I had borrowed from the bank). It's probably because it's all financed by VAG finance, which due to their enormity, probably have access to finance at similar levels to banks or small countries. Also, it is in their interests to have more of their cars on the road.

Nearly new is usually.a higher monthly.payment than new.

But this isn't right. Buying a new car for 18K, or the same model a year older for 12K.

In two years time, your £18K is worth 9K, perhaps. In 2 years time, your nearly new is worth 6K perhaps. So the new one costs you 9K in depreciation, compared with 6K plus finance costs on a larger figure.

If you get a lower priced deal, you are losing it somewhere along the line - eg, at the other end in the residual.

If you are in secure employment, it's might be a matter of taste, as to whether the cachet of a "new" car is worth the extra - but don't pretend the new car is, in general, less expensive that the used one.

It's still the opportunity cost. The extra money spent on a dearer car is the holiday/tv/home improvement you can't afford now.

And if you do buy the car outright, rather than lease, then at the end of the period you OWN a 3/4year old car that you could keep for another year at NO cost, other than the lower trade-in value for the extra year, and the extra depreciation is going to be a lot loss than first year depreciation on he new car.