How Does Leasing a Car Work

Wondering how car leasing works? Our in-depth guide to car leasing will tell you all you need to know about paying monthly for a brand-new car. 

There’s nothing complicated - just a few need-to-know bits to read up on before you make the most of our latest deals, including answers to “what is a lease car?” and more.

So, what does leasing a car mean exactly? And how does leasing a car work? 

Breaking it down, car leasing is essentially a long-term rental where you make an initial payment, then fixed monthly payments throughout the length of your contract. 

Leasing a car is often a cheaper option than buying a new car through a bank loan or dealer finance. As you don’t buy the car outright, you can spread the cost, enjoying all the benefits of a brand new car without worrying about it decreasing in value over time. 

Here's how to lease a car in a few simple steps: 

1. Browse our range of lease deals and choose the length of contract you'd like. You'll also need to tell us your estimated annual mileage. 
2. Pay your initial payment. This is usually the equivalent of three monthly payments and a common factor in how car leasing works. Road tax is included in the cost, so you don't need to worry about paying for that separately. 
3. Choose to add maintenance costs to your monthly payments. These will cover any mechanical or electrical repairs, servicing and more, potentially saving you money in the long term. 
4. Once you've agreed your contract, we'll deliver your car to your front door, for free (exclusions apply). If you selected an in-stock car, delivery will be much faster. Your monthly payments will then start, allowing you to drive and enjoy a brand-new car for the length of your agreement. 

Just like when you buy a car, you’ll need to arrange your own insurance when leasing a vehicle – unless you take advantage of our Complete Care package, which allows you to lease a car with insurance. You should also think about taking out GAP insurance to make sure you’re fully covered. 

Once your lease contract is up, you return the car – that’s how car leasing works! It's just like giving the keys back to your landlord when you move out. 

As long as the car is in good condition and you’ve stuck to the agreed mileage, you won't have anything more to pay. Not owning the car means you don't have to worry about selling it on. You can simply return it and get on with picking your new car, no hassle. 

There are three types of leasing: finance leasing, operating leasing and contract hire. 

However, when it comes to car leasing, we talk about the following two: Personal Contract Hire (PCH) and Personal Contract Purchase (PCP). 

So, how does leasing a car work when you choose PCH? This option allows you to pick a new car every few years, without the worry about the car declining in value or having to sell it. 

And how does car leasing work with PCP? It’s similar but gives you the option to make a ‘balloon payment’ to buy the car at the end of your lease contract. However, it’s important for us to note that PCP is not offered by Nationwide Vehicle Contracts.

According to the Finance and Leasing Association, four out of five people leasing a vehicle with PCP don’t buy the car at the end of their contract. If you don’t want to buy the car at the end of your contract, it’s likely that PCH will work out cheaper.

Read this guide about buying vs leasing a car to find out more about the pros and cons of each approach.

Personal Car Leasing is any long-term rental agreement designed for individuals, which allows them to use a car or van for the period of the lease. 

The two main types are PCH and PCP, but personal leasing also includes Lease Purchase Deals. Lease Purchase is a pure finance agreement where you commit from the outset to buying the vehicle at the end of the contract. 

There are also many options within personal car leasing such as used cars for those who are on a tighter budget or even electric and hybrid leases if you’re looking for something a little greener. 

When explaining how leasing a car works, a good example is comparing it to renting a property. Leasing works in a similar way, you don’t actually own the car, you just agree to use it throughout the length of your contract. 

However, unlike with a property, you’ll have to agree to an annual mileage limit and sign a credit agreement, while some car leasing agreements give you the option to buy the vehicle at the end of your deal.

How does leasing a car work when you use it for business? The major difference between personal and business leasing is that registered VAT business users can claim back VAT on their lease agreement, so long as the car is only used for business purposes. That’s why all our business lease prices exclude VAT. 

Business customers can also take advantage of exclusive business rates.

To qualify for business leasing, you’ll need to be a limited company, partnership, sole trader, charity, or LLP.

Business Contract Hire (BCH) works the same as PCH and is suitable for businesses of all shapes and sizes.

As with PCH, you pay for the use of the vehicle throughout your contract, then return the car to the finance company at the end of the agreement. Read this complete guide to business contract hire to learn more about its benefits to your business.