Explain it Like I'm 5 Years Old - Car Leasing

TractorFactor

Have I got this right?

Let's say a car is £30,000 new.
I lease it for £300 a month for 24 months.
When I come to the end of that contract, if the car is worth £20,000, that isn't the deposit amount I can put down on a new car is it?
But the £300 x 24 months = £7200 is essentially the deposit you can put down on a new vehicle?
What happens if the £7200 is more than the maximum deposit the PCP allows?

I understand the three options - hand back, buy it or use it against a new vehicle but it's that last one that I don't understand how it works.

Just weighing up the options between buying and leasing as elsewhere on the internet, someone has suggested putting money into something that is losing money isn't a good idea and thus leasing is nearly always the best way to drive cars.

Their basis was that when buying, you have an asset when it's paid off BUT out of that money, you have to think about servicing, parts and such where if it's leased, the leasing company deal with all of that stuff as well as road tax and such.  The math means leasing is much more attractive, despite not having an asset at the end of it.

Brie

I considered leasing but didn't because I didn't know all the relevant info about the financing.  And the company "selling" to me could tell me.  Basically all they could tell me was I would pay X a month for 3 years and then I could buy the car outright for a price.  But couldn't tell me the price as that would depend on the market 3 years into the future.  So essentially I was buying something without know how much it was going to cost me.   Not like me getting a loan and knowing that I would pay a certain APR and the total payment over the term was set.  I like things to be set out simply.  I also didn't like the idea that "everything is covered - except in the following circumstances" which again was too vague for me.  

Others love it, just not me.

la531983

TractorFactor said:

Have I got this right?

Let's say a car is £30,000 new.
I lease it for £300 a month for 24 months.
When I come to the end of that contract, if the car is worth £20,000, that isn't the deposit amount I can put down on a new car is it?

I 

If paying 24 x £300 for 2 years to get a 20k deposit on a car was a "thing", everyone would be doing it.

https://www.vanarama.com/guides/car-leasing-explained/what-happens-at-end-of-car-lease

Car_54

TractorFactor said:

Have I got this right?

Let's say a car is £30,000 new.
I lease it for £300 a month for 24 months.
When I come to the end of that contract, if the car is worth £20,000, that isn't the deposit amount I can put down on a new car is it?

I understand the three options - hand back, buy it or use it against a new vehicle but it's that last one that I don't understand how it works.

Just weighing up the options between buying and leasing as elsewhere on the internet, someone has suggested putting money into something that is losing money isn't a good idea and thus leasing is nearly always the best way to drive cars.

Their basis was that when buying, you have an asset when it's paid off BUT out of that money, you have to think about servicing, parts and such where if it's leased, the leasing company deal with all of that stuff as well as road tax and such.  The math means leasing is much more attractive, despite not having an asset at the end of it.

You're confusing leasing and PCP.

Leasing is like car rental, but over a longer period. You pay a monthly rental for 36 (or 48 or whatever) months, and at the end you hand the car back. No other options.

Nobbie1967

Assuming you are talking about PCP rather than leasing then they calculate the payments so that you have paid off everything except the value of the car at the end of the PCP. If they predict that value accurately then that £7200 covers the interest and depreciation over those 24 months and at the end you still owe £20k, but the car is worth that so you can walk away with nothing. However, they tend to estimate a lowish value for the car at the end of the contract, say £18k, so at the end you owe 18k, but the car is worth £20k giving you £2k as a deposit towards a new car. However, this is never guaranteed and depends on the used car market.

Grumpy_chap

The OP has mixed together PCP and lease.  It does seem as though the OP means PCP.
The OP has not mentioned the upfront deposit payment in the figures mentioned.

WellKnownSid

An ELI5 explanation:

Cash.  You can afford to buy a car.  You end up spending £30,000 on a £30,000 car.

HP.  You can't afford to buy a car.  You end up spending £36,000 on a £30,000 car.

PCP.  You can't afford to finance a car.  You end up spending £40,000 on a £30,000 car. 

Leasing.  You don't want to own a car.  You spend £5,000 a year to rent someone else's £30,000 car.

Mildly_Miffed

WellKnownSid said:

An ELI5 explanation:

Cash.  You can afford to buy a car.  You end up spending £30,000 on a £30,000 car.

HP.  You can't afford to buy a car.  You end up spending £36,000 on a £30,000 car.

PCP.  You can't afford to finance a car.  You end up spending £40,000 on a £30,000 car. 

Leasing.  You don't want to own a car.  You spend £5,000 a year to rent someone else's £30,000 car.

No, not quite.

Cash: You buy the car at the start with your own money.

HP: You borrow the entire purchase price, and pay it all back over the term. At the end of the finance, you own the car.

PCP: You borrow the entire purchase price, and pay the expected depreciation over the term. At the end of the finance, you still owe the pre-agreed depreciated value. You can then buy the car for that figure, or you hand it back. If it's worth more than expected, you can buy-then-sell, and put the difference to your next car.

Lease: You rent the car. At the end, you hand it back.

Whether HP, PCP, Lease work out cheaper is going to vary on the precise figures, and on how actual depreciation works out compared to expected.

Herzlos

WellKnownSid said:
HP.  You can't afford to buy a car.

Not always. It may be more prudent financially to borrow the money and pay it back than to use cash. For example you may suffer financial penalties from pulling the money out of savings, or you may be making more in yield from the cash than the debt interest.

ontheroad1970

WellKnownSid said:

An ELI5 explanation:

Cash.  You can afford to buy a car.  You end up spending £30,000 on a £30,000 car.

HP.  You can't afford to buy a car.  You end up spending £36,000 on a £30,000 car.

PCP.  You can't afford to finance a car.  You end up spending £40,000 on a £30,000 car. 

Leasing.  You don't want to own a car.  You spend £5,000 a year to rent someone else's £30,000 car.

Sorry, this is so over simplistic that it's unhelpful.  There are all sorts of reasons to use credit facilities to buy or rent a car.  Some think that paying to never own something is poor value, but in many ways this is a hangover of Thatcherite policies of you are nothing unless you own 'X'.  Each individual is well individual, and different things will benefit different people in different ways.  If you see yourself as never holding on to a car beyond a PCP deal, then leasing is better value.  

HP or similar: You can afford to pay cash, but put 30k on a credit deal because of low/no interest deal or other incentive.

Lease: You might have the view that there is little point in owning a depreciating asset.

oscarward

Leasing can work for you if you are on a fixed term contract or something similar where you have no need for the vehicle at end of contract.

we currently have a HP deal ongoing. Suits us as we can pay it off when convenient. We could have paid cash but it meant crashing a fixed term is a, so wait for that to end then pay it off.