Running a car is expensive. As we pointed out in a previous article, car running costs are increasing and now average around £5,700 a year for an average family car.
Depreciation accounts for around half of the annual running costs, as you can see in this summary of motoring costs published by the AA.
Its sensible to look at ways to reduce the costs of owning a car so we are pointing out five reasons why leasing a car makes good financial sense, in this article.
What is car leasing?
Car leasing is another term for renting a car over a fixed term. You don't own it and you don't pay any “balloon” payments at the end of the term as you can't buy it.
You merely pay a monthly leasing (rent) charge and a initial up front cost based on the monthly rent. At the end of the leasing term you give the car back to the leasing company.
Car leases are generally for two or three years but can be just for a one year period. Car leasing is available to both business users who can reclaim the VAT on the leasing costs, and personal users.
What are the leasing costs?
The actual costs depend on the value of the car, its expected value at the end of the lease term and your annual mileage. Most leases are based on an annual mileage of 10,000.
For a three year lease you are asked to pay three months lease costs up front with a further 35 monthly payments to follow. This is a so called 3+35 plan, and is the most common leasing arrangement.
So if your car lease costs £300 per month, you pay 3 x 300 up front followed by a further 35 monthly payments of £300 making a total cost, over three years of £10,860.
You pay all insurance and servicing costs, although you will be driving a new car which mostly have three year warranties so your servicing costs will be mainly for small “oil change” servicing.
Depending on the leasing company concerned, you may well find that they pay for all road tax during the leasing period.
So that has explained what leasing is, now lets look at the reasons why its a good idea:
1) Large capital sums are not required
If you go to a car dealership and buy a new car, you will have to either put down a large deposit and then take out a finance package, or pay for the car in full by writing a cheque or similar.
With cars costing £10,000 or more this means spending a large amount of your capital. Capital is hard to achieve and it is best working for you by earning interest in a savings account, or other investments.
If you lease a car all you pay up front is the amount equivalent to three monthly leasing costs. In our example above, all you need to pay is £900. You can then put the rest of your money in a high interest savings account.
2 ) Be smart – let someone else pay the depreciation
Going back to our £300 per month leasing example, you could get a new 1.9 TDi Volkswagen Passat for that monthly cost, even on a personal basis where you have to pay the VAT. Depending on exact specification, this car would cost around £17,000 to buy new.
If we assume that this car would depreciate by 60% in three years, you would lose £10,200 over this time in depreciation! You would also be paying more for either finance charges or the loss of interest on your capital.
Whilst these figures are similar to the lease charges, if leasing the car, you give it back at the end of the lease and get a new one, whereas the owned car would keep on depreciating, also costing the owner finance and larger maintenance costs.
Leasing, rather than buying a car makes real sense and saves huge amounts of money on the most costly item – depreciation.
3 ) You can change your car more often
As you are not continually financing large losses from the depreciation associated with owning a new car, you can get a new car much more often. At the end of every leasing term, in fact.
So if you feel like a new car every two years, then sign a two year car leasing agreement and chose a different car for your next lease. You walk away from one car to the next and only have to pay the two or three months initial rent and any increased, or decreased monthly lease payments.
4 ) Your car is always under warranty
With most cars being covered by a three year warranty, you will always be driving a car that is covered by parts and labour warranties. If anything goes wrong with it, then the manufacturer will fix it at their cost.
All you pay is the normal servicing costs – oil change services, new tyres, windscreen wipers and the like. You don't even need to pay expensive main dealer servicing costs. As long as you take the car to a VAT registered garage, the warranty will be protected.
This reduces the running costs significantly.
5 ) You may be able to drive a better car!
This one goes slightly against our stance on saving money, which is what car leasing does, but you can see that the monthly costs of leasing a car are far less than owning it.
This means that for any monthly budget amount, you can almost certainly lease a better car than you can afford to own. So you might find yourself driving around in a far better leased car than you could have afforded as its owner.
Some leased cars look very tempting for reasonable monthly payments, but it depends on your priorities as to whether you should be tempted or not.