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Purchasing a new or used vehicle is always a daunting process – it’s likely to be one of the most expensive financial outlays you ever make and it’s important to make the right choice when determining your method of car finance. More and more people are turning to car leasing as a cost effective way of getting the car they want without taking as many risks as with the other financial options available.
At ContractHireAndLeasing.com we want to answer all of your car leasing questions so you can make an informed choice about whether car leasing is really right for you; inform you about the other methods of car finance; and explain how car leasing special offers work. So read on for this no-nonsense car leasing guide which will put you on the right road to the vehicle of your dreams.
WHAT IS CAR LEASING?
The process of car leasing is straightforward enough – you pay a monthly sum to drive a car around, usually over a two-four year period, but the car is never actually yours to own. At the end of the term you simply give the car back to the dealer, take out a new lease, or, in some cases, you might be given the option to buy.
Car leasing deals with arguably the biggest problem associated with buying a new car – the fact that the car immediately loses a large portion of its value as soon as you drive it away from the garage. Of course, the more you drive your vehicle the less it is worth but different makes and models have different depreciation rates.
Consequently, when you take out a car lease, a sum is worked out known as the ‘residual value’ – this is an estimate of what the car will be worth at the end of your lease period. Your monthly payments are then based on the manufacturer’s suggested retail price (or the price you negotiate with the dealer) minus the residual value. In other words, you pay the difference between what the car is worth when you take out the lease and what it is estimated to be worth at the end of this period.
This means that the higher the residual value of the car, the less you will pay on your car leasing deal.
WHAT ARE THE OTHER METHODS OF CAR LEASING?
In part two we will examine the pros and cons of car leasing, but first it is important to be aware of the other methods of car financing available. These are:
- Paying by cash – An option not available to many, but all interest payments are avoided if you have enough money set aside to buy a vehicle outright. However, even if this is the case you should think hard about whether you can afford to commit so much money into a single purchase, particularly as the value of your investment decreases immediately. Leasing could be a better option if you want to change your car every few years.
- Personal car loans – With a car loan you own the car from day one – however, you will need to repay the original value of the vehicle plus interest. Personal car loans come with a strong element of risk as if you cannot afford to make repayments, you could lose your car, or even your home if that is what you have secured your loan against. Loan rates vary and each application will have an affect on your credit rating – receiving a poor rate could leaving you paying thousands of pounds extra on a car. The good news however, is that there are a large number of car loan lenders and there are no restrictions on the type of car you drive or the mileage you accumulate. Generally, car loans are best suited to those who know they can afford to repay the loan quickly.
- Hire purchase – This is a similar process to car leasing except that the car is yours at the end of the leasing period. You pay a deposit and monthly instalments over an agreed period before the car becomes yours – so in effect you are taking the car with a right to buy. The key to finding a good hire purchase agreement is to shop around between online dealers and brokers as interest rates can vary widely. Many manufacturers will offer their own promotions, which are well worth considering. A hire purchase loan is always secured against the vehicle so there is no risk of losing your home, but do look out for additional fees such as an ‘option to purchase’ fee.
- Personal contract purchase – This is a type of car leasing which gives you the option to either pay a final sum to own the car, or return it to the dealer. The car is not yours until the end of the term and it is important to note that there may be mileage restrictions in case you wish to return the vehicle. However, there is real flexibility as to what you want to do with the car at the end of the term and, as with regular car leasing the payments are usually much lower than a personal car loan. Occasionally, depending on the personal contract plan you choose, you may receive additional incentives such as inclusive road tax or maintenance costs.
Having examined the car finance options available to you, the second part of this car leasing guide will examine the pros and cons of car leasing, its benefits and who it is right for.
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