Should you lease or buy your next car?

How does car leasing work?

Leasing is basically long-term rental. You don’t own the car outright – you’ll pay a monthly fee to use the car over an agreed period of time, and number of miles.

If you want a car leasing contract, you’ll have to pass a credit check first. A positive credit history may help your chances of being approved for a leasing agreement.

Why do people lease cars?

Some people can’t afford to buy a car outright, so leasing a car, as opposed to paying a lump sum to buy one, may be a better option.

Leasing a car might also be more suitable for people who drive fewer miles, or are able to keep their car looking clean and tidy – they’ll avoid paying extra charges for repairs and cleaning when the contract ends.

It can also be a good choice for people who might want to change their car after a few years.

What is personal contract hire?

Personal Contract Hire is a leasing agreement which lets you drive a new car over an agreed time period, typically between two and five years.

The benefits:

• You don’t have to worry about selling it
• Terms can be flexible
• PCH often comes with maintenance packages which covers things like road tax

The potential risks:

• If you return the car with damage there could be extra charges for repairs
• If you leave early, you may have to pay extra fees
• Mileage limits can’t be changed midway through the contract, so if you drive over your agreed limit, you’ll be charged
• You may have to pay around three months’ lease upfront

Leasing a car with bad credit

If you have a poor credit history, you could be seen as more of a ‘risk’ for lenders, so some lenders may increase the interest rate they apply to your repayments. Bad credit can also mean your repayments are likely be higher, so it’s important to make sure you can afford them.

Finally, you may also have to pay a deposit; however, this isn’t always a bad thing. If you pay a large initial deposit you’ll lower your monthly repayments and interest charges.

You do have alternative options if you’re refused credit for a car – the main priority should be finding out if there are any issues with your credit history, and then working out how to resolve them.

Using a guarantor on a car lease

A guarantor is someone who will take on your repayments if you’re unable to continue making them. This means that if you miss a payment on your car, your guarantor is legally obliged to take care of it.

If you want a guarantor, they must be someone who:

• Is generally at least 18 or 21 years old
• Has a good credit history
• Is financially stable

How does leasing a car affect your credit score?

Because you’re effectively ‘borrowing’ finance when you lease a car, leasing will affect your credit score if you don’t keep up repayments – but it can be beneficial if you make all of your payments on time.

• As long as you make your repayments on time, there shouldn’t be a negative effect on your credit history
• Demonstrating a history of responsible borrowing can help your chances of getting mortgages, car insurance and credit cards in the future

Credit companies see a lease as a loan – the only difference is that the ‘loan’ is the sum of the payments you owe and not the car’s value.