What Does it Cost to Lease a Car?
There are several obvious factors which can influence the cost of leasing a car: the type of vehicle you choose, insurance and road tax, the length of your desired lease, and the leasing company you decide to do business with.
This article does not discuss these aspects in great detail, nor does it compare the price of leasing with that of purchasing a vehicle outright, as endless other articles on the subject. Rather, it discusses the potential additional costs involved in leasing a car which you may not have considered, and also suggests a number of ways you can keep your leasing overheads as low as possible.
Additional car leasing costs you may not have considered
Many people use online comparison calculators to determine the best prices for leasing a car. Often however, these tools do not take into account some costs which are not usually covered during the initial stage of a lease application. Some of these costs may be calculated and spread across the contract’s monthly payments, while others can be applied once the contract has ended. Other supplementary charges meanwhile are dependant on the actions of the lessee during the agreed period.
It is important to note that even with the addition of these costs, leasing is seldom more expensive than buying a car, and it offers a number of advantages.
The less obvious, supplementary costs which can be involved in leasing a vehicle include:
- A non-refundable deposit
- Vehicle maintenance costs
- Late payment fees
- End of lease penalty charges (for damage and/or extra mileage) and
- A disposition fee
Let’s look at each of these costs in a bit more detail.
A non-refundable deposit
Many leasing companies will demand a non-refundable deposit when you agree to a contract. This security deposit is often equivalent to three monthly lease payments, and is designed to protect the leasing company from non-payment and/or non-adherence to the agreed leasing terms.
The reason this deposit is non-refundable it that it is subtracted from the overall cost of a lease (i.e the amount paid is spread across the contract’s monthly payments). It is easiest to think of this deposit as an advance.
Vehicle maintenance costs
It is a common misconception that vehicle maintenance costs are included in the majority of car lease contracts. While many leasing companies do offer complimentary breakdown assistance, the costs of maintaining the car and fixing any problems is most often the responsibility of the lessee.
A number of companies can provide add-on maintenance packages as part of their leasing deals, to help customers spread the cost of basic servicing. The cost of additional maintenance (a broken windscreen, for example) however, will usually need to come from the pocket of the lessee.
Fortunately it is the case that most leased vehicles are new, meaning they require far less maintenance than older models and will very likely be under warranty.
Late payment fees
Should you ever fail to make a monthly lease payment, either because it slipped your mind or a change in financial circumstances means you’re unable to pay, it is important to let your selected leasing company know as soon as possible. While informing the company of your situation probably won’t see late payment fees waived from your account, doing so could see further charges and problems avoided.
Should you need to end your lease contract early, you will be expected to pay an early termination fee if you have not already invested in Early Termination Insurance or Redundancy Insurance.
End of lease penalty charges
Penalty charges could be applied at the end of your lease contract should it be the case you have damaged the vehicle beyond what is considered ‘fair wear and tear’, or if you’ve exceeded the agreed mileage limit.
Penalty charges vary between different leasing companies - one might charge pennies for each additional mile, another pounds, for example. This means a leasing deal that appears affordable initially could sting you later if you’re not careful.
A disposition fee
This is a fee charged by some leasing companies when a lease contract reaches its end and the lessee does not wish to purchase the vehicle. This fee covers the leasing company's costs related to the scraping, refurbishment, storage and/or resale of the vehicle once the lease is over.
In some instances, this fee will be spread across the agreed monthly payments to make it more affordable, or waived should the lessee decide to lease another vehicle with the same contract hire company.
IMPORTANT: Always ensure you ask about, and understand, how these charges apply to a car lease contract of interest BEFORE you sign on the dotted line.
Ways you can save money when leasing a car
In the wake of all those potential additional charges, you may now be wondering how you could save some money when leasing a car.
Here are four useful tips:
#1: Consider trading in your current vehicle
If you currently own a vehicle you could comfortably part with, you might like to consider trading it in as part of your contract hire deal. It might be the case that your monthly payments will be lower as result, or that you’ll have to claim the value of your traded motor back later and/or from another company, depending on how your chosen lease dealer operates its trade-in arm.
Make sure you understand exactly how your trade-in discount will be applied BEFORE handing over your vehicle.
#2: Remember: vehicles leased by businesses are valid for VAT reclaim
Did you know that 50% (and in certain cases: 100%) of VAT paid on vehicles leased for business purposes in the UK can be reclaimed, should certain criteria be met?
To learn more about VAT refunds for leased business vehicles, visit this page of the HM Revenue & Customs website.
#3: Be careful should you decide to extend your lease
At the end of your agreement, you might decide that you would like to continue leasing the same vehicle. Before you agree to extend your lease however, you should ensure that your monthly payments will not increase, and that the revised payments offer good value when depreciation, and the current market value, of your leased car is considered.
Leasing a newer model may provide better value for money, so be sure to fully investigate your options.
#4: Don’t be scared to negotiate!
Many leasing companies would rather you didn’t know, but it is often possible to negotiate a number of charges involved in taking out a new lease contract. The administration fee and the cost set for each mile above the set limit are two examples of charges which are not always absolute, and often inflated to ensure maximum profit.
A car leasing company won't wish to lose your potential custom to a rival for the sake of a few pounds. As such, it is worth mentioning that you’re “still deciding between a few leasing companies” to help ensure you're offered the best possible deal.