The biggest problem with the car industry is that everyone is selling something, so it's difficult to know what information to trust. Of course, car dealers want you to own a car, and car leasing brokers are going to promote leasing a car. But the truth is, there is not a 'one size fits all' answer to car leasing or buying a car. It really depends on your circumstances.

We like to own cars

As a nation, we're brought up to own things. We like to buy houses when a lot of Europe prefer long term rentals. A lot of people buy their cars because it's what feels comfortable. If they can afford a new car, they buy one, normally on finance, if not then they tend to pick up used cars that are 3-5 years' old. Owning cars is a habit. Ask our parents about leasing and many will be very sceptical because it goes against the grain.

But here's why your car is different than a house. Unless there's a house market crash, your house will usually increase in value. Your car, on the other hand, is a depreciating asset. The longer you have it, and the more you use it, the more it's value decreases.

With a car lease, you don't need to worry about depreciating car values; that's a headache for the finance company. When you lease a car, you are literally paying the difference between the amount the car is bought for and the amount the leasing company predicts the car will be worth when the lease finishes.

It makes economic sense to lease a car. Let us give you an example:

You buy a new car, and you are offered finance over three years. The car costs £15,000, straight from the dealer.

So, £15,000 / 36 months = £416 per month

There will be some interest and additional fees, but as a guide, you would expect to pay something similar to this.

Whereas, with a leased car, you pay the amount the car has depreciated over the three years. For example, with a £15,000 vehicle, it's reasonable to expect that the car will depreciate by 18 per cent the minute it is driven off the forecourt, and another 9 per cent a year. So 36 per cent depreciation of the example car would mean a lease cost of £5,400.

£5400 / 36 months = £150 a month

So, financially it makes sense. But also, because you have a brand new car, which comes with a full warranty, you don't need to worry about anything breaking down, and significant wear and tear is also very unlikely. So you get a set fee to pay each month and peace of mind. That's pretty much what car leasing boils down to. You also get to drive better cars, because premium brands tend to depreciate slower, which makes them a better deal. So lots to think about.

There are some drawbacks to car leasing

You have to estimate your car mileage for each year, and you have to keep the car in good condition (not always easy with some kids, or some dogs).

Leasing companies estimate the price of the car after the lease is over. We all know the number
of miles a car has done affects used car prices. If you say you'll do 10,000 miles a year, but you do 13,000 a year, then it's likely the car will be worth a little less at the end of the lease than predicted. The leasing company will ask you to pay a fee.

The solution is to let the leasing company know you're driving more than you estimated, they'll adjust the monthly fee slightly, so you're paying slightly more, but there won't be any nasty surprises at the end of the lease. But it is a restriction to be aware of.

The other major drawback is the elephant in the room. You will never own the car. This means that, at the end of the lease, you have to give the car back. Most people would just lease another car, but if your circumstances change and you can no longer afford to lease, it means you'll be left without a car until you can buy an old banger.

You are also tied into a contract for three years. If your personal circumstances change and you can't afford to pay for the car, you can't give it back like you sometimes can when you take a car on finance. It's called Voluntary Termination (VT), it will ruin your credit score, but it's possible. With car leasing, you might be able to speak to the finance company and get them to agree, but it's usually after the halfway period of the lease because, until then, they are leasing the car at a loss. The car depreciates faster than the monthly repayment covers for the first 18 months, which means leasing companies will be reluctant to agree to take the car back until then. So, if you are not sure how stable your income is, then leasing might feel a little restrictive. It really depends on how you manage your finances as to whether it would be an issue or not.

Summary

Car leasing is increasingly popular, especially in 2018 where you can get deals with less deposit required. They offer a set fee each month, which is usually less than you would expect to pay if you buy a car on finance - and much less up front for sure. And you get peace of mind; it's a brand new car, so you are covered by warranty. You also don't have to pay for an MOT.

So tonnes of advantages. If you usually buy a used car on finance for three years, you are very likely to be able to pay the same (or less) on a lease car and get to drive around in a new model for three years. The difference being, at the end of the lease, you'll have to give the car back, not
own it.

But the drawback of leasing a car is that you are tied into the contract for the term of the lease
(normally 36 months, but 12 and 24 months are available too). If you don't have stable employment, that might feel a risk. Additionally, you're asked to estimate your mileage and keep the car in good
nick, which is also a restriction. It's never yours. So it's horses for courses. A lot more people are going the car leasing route as deals get better and better, but some prefer the freedom of having a car and owning it, and they don't want to be tied down to a contract. There's no right or wrong answer; it just depends on what sits better with you.