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Car and Van Leasing Explained
By plrprousers | December 27, 2008
Acquiring a new or used car can be one of the most expensive acquisitions that any of us must manage. There aren’t many of us who are able to buy a new car outright with cash and most will need to consider other options such as car loans, leasing or hire purchase.
There are such a bewildering range of options to consider that it can be near impossible to know which to choose. Many people today are opting for personal car leasing contracts which will provide a brand new automobile at a monthly cost that is often significantly less than it would cost to repay a car loan used to purchase the same vehicle.
How Car Leasing Works
To understand how automobile leasing companies are able to provide top of the range, brand new vehicles at such competitive monthly rates you need to understand how car and van leasing works.
When you lease a car you never actually own it. You are effectively hiring the car for an agreed duration and mileage from the car leasing company. The vehicle leasing firm are effectively loaning you the vehicle in return for your monthly payments. These cover two things: the depreciation or fall in value of the vehicle and the interest on the cost of the vehicle.
The depreciation in value of the automobile is estimated based upon the anticipated mileage and the agreed lease period which is typically between 2 and 4 years. The value of the car or van at the end of the agreed contract period is called the residual value. The difference between the residual value and the manufacturers suggested retail price is then covered by the agreed monthly repayments.
The interest on the value of the vehicle is effectively the cost of the finance to you. When you take a vehicle on a lease contract it’s rather like the leasing firm have given you a loan. Your monthly repayments will include the interest on this effective loan amount, which is usually the manufacturers suggested retail price of the vehicle.
If, for example, you were to sign up to a car leasing contract on a vehicle priced at £20,000 over 2 or 3 years with an agreed mileage. The car leasing firm will calculate the depreciation in value of the vehicle over this period along with the interest required on the effective loan and your monthly payments will cover these costs. The return of the car or van a the end of the contracted period repays the effective loan.
If you were to buy the same vehicle using a loan repaid over the same period you would of course be paying back both the interest on the loan and a proportion of the capital each month. What you wouldn’t have to pay for is the depreciation or fall in value of the vehicle.
So how is it that monthly car leasing payments are often so much less than car loan repayments over the same period for the same vehicle? This comes down to the value of the car or van. When you purchase a new vehicle from a garage you will be paying the forecourt price tag or the manufacturers recommended retail price which covers the trade cost of the vehicle to the garage along with their profit in the deal.
When a car leasing firm acquires vehicles they are not paying forecourt prices. They are paying trade cost prices which are much lower. This means that, although you may drive away a £20,000 vehicle, the loan to you will effectively be much less, maybe only £15,000. This makes the monthly interest much less than it would be on a car loan of £20,000. It also means that the depreciation costs are less than they would be if the vehicle had actually cost the car leasing firm £20,000.
You can see that a crucial factor influencing the cost to the car leasing customer is the trade cost of the vehicles paid by the car leasing firms. Because they can often turn over a high number of vehicles they are in a strong position to negotiate favourable trade prices from their automobile suppliers. They need to predict their anticipated vehicle requirements and will generally be given substantial discounts that enable them to supply vehicles at what can appear to be unbelievable monthly payments.
Personal car leasing or contract hire provides a hassle free and cost effective way for private individuals to drive the vehicle of their choice. Personal contract purchase differs from contract hire in that the vehicle is not necessarily returned to the leasing company at the end of the agreed period. Instead you are given the option to either pay an agreed final sum to own the vehicle or return it to the dealer.
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