What is vehicle leasing? Car and van leasing in the UK explained

What is vehicle leasing? Car and van leasing in the UK explained

What is vehicle leasing? Car and van leasing in the UK explained
19 May 2022

Contract hire, or leasing, is one of the most convenient and affordable ways to obtain a new car, van or truck. There is an initial rental (often called a 'deposit'), followed by equal monthly payments for a period of time (generally two to five years) years. Lease payments are generally less than other types of vehicle finance.

Leasing is different from other forms of vehicle finance because you are effectively renting the vehicle and you do not own it after making all of your payments. At the end of your lease agreement, the vehicle is handed back to the funder. 

How does vehicle leasing work in the UK?

It is possible to lease a used vehicle, but in general, leasing applies to brand new vehicles. 

Simply choose the vehicle you want to lease and request a quote - it is always wise to ask a few vehicle leasing companies for quotes on the same vehicle so you can compare the leasing deals they offer. If you're leasing a van for your business, you can also ask the leasing company to help you pick the right vehicle for your needs. 

Once the vehicle is chosen and the leasing deal that has been offered to you is satisfactory, you can proceed to the next step. In order to secure your vehicle, your leasing company will send you a customer order form, which you need to fill out and return as soon as possible. Following receipt of your signed customer order form, the leasing company will apply for vehicle finance on your behalf. When your finance application is approved, the only thing left is to wait for the vehicle delivery. Once your vehicle is delivered and you're happy with it, you then have to pay your agreed initial rental, followed by monthly payments for the duration of your vehicle lease agreement. 

How much does it cost to lease a van or a car in the UK?

The monthly van leasing rental is based on the cost of the vehicle set by the funder and a number of individual factors - a leasing company would need to know about those factors before they can give you a quote:

Type of lease - business or personal

It is so the vehicle leasing company can determine what products to offer and whether or not to include VAT in the rentals.

Contract length

You can lease a vehicle in the UK for two to five years. Longer lease terms generally result in lower monthly rentals, but this isn't always the case. A lot that depends on the depreciation of the vehicle, that is, how much the vehicle will be worth at the end of the contract. 

Annual mileage

Your funder calculates the residual value of your vehicle at the end of your lease and uses that figure to calculate your rentals. The residual value of a vehicle is heavily influenced by its age and mileage, so your funder must know how many miles the vehicle will have accumulated by the time your agreement ends. 
 

You can find out more about mileage allowance by reading our handy guide Why do I have to declare annual mileage when leasing vehicles?

Important: You shouldn't underestimate your mileage.

Excess mileage will result in extra charges. Your mileage agreement determines how much you will be charged. In case you have any further questions regarding this, please see our FAQ - Excess mileage charge explained.

It may happen that circumstances change during the course of the contract and that the declared mileage allowance is now too high. Your leasing company should assist you in resubmitting an updated mileage report to the funder and, as a result, reduce your monthly payments. They may also be able to increase your mileage allowance depending on your contract type and funder. However, this will increase your rental cost. Our Can I amend my mileage allowance on my lease? FAQ explains this process in more detail. 

Initial rental

In general, this is the amount you pay in the first month after your car or van has been delivered. You must specify how much you would like to pay as an initial rental payment. It will usually be equivalent to 3, 6, 9 or 12 monthly vehicle rentals, although some customers prefer to pay a fixed amount (e.g. £2,000). Higher initial rentals are associated with lower monthly rentals. 

For instance, you decide to pay 6 monthly rentals as your initial rental. The quoted monthly rental for your new vehicle is £250, so your initial rental will be 6 x £250 = £1,500.  You'll pay £1,500 in month one, followed by £250 per month for the rest of the contract term.

Advantages to vehicle leasing

  • Monthly rentals are affordable and fit your budget
  • As the upfront costs are lower than purchasing a vehicle outright, you will have more cash to invest in your business or to boost your personal finances
  • There are many new vehicles to choose from; the choice is yours
  • Your leasing company will handle all administration work and processes, leaving you free to focus on your main work responsibilities
  • Leasing eliminates the risk of your valuable assets depreciating

Things to consider before leasing a vehicle

  • You are responsible for maintaining, servicing, and ensuring the proper operation of the vehicle. However, if you choose a maintained agreement, the funder will handle all of these.
  • Contractual limits can lead to extra charges, such as excess mileage and early termination charges, which are specified in the contract.
  • You will be charged for any damage to the vehicle that is not a result of normal wear and tear.

Personal leasing options

Individuals shouldn't have to struggle with vehicle finance. Below are some of the most common car leasing products. 

Personal Contract Hire (PCH)

Leasing is the most popular option for people looking for a regular payment and the chance to drive a brand new vehicle every two to five years. Personal Contract Hire allows you to include extras such as servicing, maintenance, and breakdown cover to further control your budget.

The leasing company covers the risk of what the vehicle will be worth at the end of the contract, so there are no surprises. As soon as the agreement is completed, the car is returned, and an order can be placed for a brand new vehicle. Personal Contract Hire doesn't give you the option to buy the car at the end of the lease.

Personal Contract Purchase (PCP)

There will be many similarities with Personal Contract Hire (PCH), such as fixed monthly payments, but unlike PCH, you will also be able to purchase the car at the end of the agreement. How much you'll have to pay in order to keep the car will depend on its value at the end of the contract. The value will be determined by the car's age and mileage. After the agreement ends, you will also have the option to return the car.

Business leasing options

Here's a brief overview of some of the funding options available to you to help you decide on the best option for your business.

Business Contract Hire (BCH)

For small and medium-sized businesses, Contract Hire is one of the most popular means of van financing. It's also one of the most straightforward. A fixed monthly rental is paid for the use of business cars or vans. You agree on a term, usually between two and five years, and how many miles the car or van will cover during this timeframe.

What makes contract hire so popular?

  • Payments are predictable each month
  • VAT can be recovered
  • You can include your vehicle maintenance costs
  • You don't need to worry about depreciation cost

Finance Lease

Finance Lease is a strictly business product, not available to individuals.  

With Finance Lease, your company can lease its cars and vans for a fixed monthly fee - but unlike Contract Hire, it transfers the risk and potential rewards, of ownership to your company. 

You can choose from two different options depending on your cash flow:

  • Finance Lease (fully amortized) - your lease payment is determined by the full cost of your vehicle, not its expected residual value
  • Finance Lease - rental payments are based on a percentage of the cost of the vehicle, with the balance offset until the end of the lease - allowing for smaller monthly payments

Business Contract Purchase (BCP)

With a Business Contract Purchase, you can get a car or van for your business with fixed monthly payments, fixed terms, and fixed mileage allowances. You may also decide to purchase the vehicle after your agreed term has expired. Generally, you can only recover VAT on the service element or the VAT invoiced upfront on commercial vehicles.

Business Lease Purchase (BLP)

Lease Purchase is the ideal option for businesses that are not VAT registered and don't want to pay upfront costs for vehicles but still wish to own them. In order to complete the purchase of the vehicle, you will need to make a final 'instalment payment' (a lump sum payment at the end of your term). Maintenance is not included as it is purely a financing product.

Resources you may find useful

Fair wear and tear guide for cars

Fair wear and tear guide for vans

When it comes to running a business, you might also want to consider the pros and cons of leasing versus buying a business van - see our comparison guide To buy or lease a van?

Moreover, you may wish to explore how leasing will affect your business taxes - our article about Tax Benefits and Implications of Business Car and Van Leasing will provide you with all the information you need. Check out our Reclaiming VAT on a leased vehicle blog if you're leasing a van for VAT registered business.

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We work in partnership with many of the UK’s leading van leasing, car leasing, contract hire and finance leasing funding companies in order to provide the most competitive rates and offer you the best leasing deals possible. Our guide to eligibility will help you understand the various requirements for establishing a vehicle finance agreement.

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Achieving the best van leasing deals and the best car leasing deals has become a key consideration in the work we do, so you can get the best leasing deals. Our process is built to ensure we accurately and efficiently identify your needs and requirements, achieve the best finance deal for you, apply for finance on your behalf and provide you with the quickest delivery possible.

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