How Vehicle Leasing Works

Most people would describe leasing as renting a car, but that is a deceptive notion. The truth is that leasing is just an alternative method of financing a vehicle. Unlike a traditional car loan, leasing is the type of financing where you pay to use a vehicle instead of buying it. The use of a vehicle comprises of its depreciation cost, any undue mileage, and any excessive wear and tear you cause for the duration of your lease. As with traditional financing, you will have to pay an interest rate on the buying price of the vehicle.

Business or Personal Contract Hire

Business contract hire is the technique that businesses can use to finance their vehicles with a minimum down payment and an arranged mileage for the contract. The minimum payment on business contract hire is usually three payments in advance. At the end of the fixed period, you return the car to the finance company. You must repair any damage prior to return, or it will be charged in addition to the contract.

Personal contract hire is very comparable to business contract hire. However, unlike business contract hire, personal contract hire allows you to recover blocked VAT.

Duration of Contract and Annual Mileage

You will agree with your finance company on the mileage prior to the contract start and will be typically a minimum of 10, 000 miles per annum, and a maximum of 40,000. The company will charge you for any mileage over and above the agreed limit and you will receive the bill at the end of the contract.

Personal contract hire is not PCP, which is a different type of agreement, although very similar. Personal contract hire indicates that you must return the car back to the finance company at the end of the contract. You will repair any damages or pay for them in addition to the contract.

Maintenance Costs

The vehicle with regards to both personal contract hire and business contract hire will belong to the finance company. However, you will be the registered keeper of the vehicle. One of the alternatives available for leasing your next vehicle is whether or not to take out a maintenance contract.

You can have maintenance added to your lease for a permanent supplementary monthly cost, to cover servicing, replacement of tires and other repair costs. The idea behind taking out a maintenance package is to give you complete peace of mind to cover costs you may have budgeted for when taking out a lease.

Insurance and Gap Insurance

Getting a new car is quite exciting but there is a risk involved. The car may depreciate in value rapidly. If you are in an accident, your insurance coverage may not be sufficient to get you a new car. GAP coverage includes new car replacement for the first year of ownership and will then pay the difference between the value of your vehicle and the amount of your original loan.

With Gap coverage, you can get a reimbursement up to 120% of the value of your vehicle. In this case, your insurance company will pay your loan in full.

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