A lease is essentially a legal agreement between two parties surrounding the use of an asset.
The two parties involved in the agreement are the owner of the asset and the lessee (the party who will be using the asset).
The owner agrees to allow use of their asset for a specified period of time in return for a periodic payment.
Leases or leasehold agreements are used on various assets including vehicles, land, property, equipment and services.
Rather than buying the asset outright, you are simply renting it for a certain period.
Leasing in the automotive industry
Leasing is becoming more and more popular in the UK automotive industry. It allows consumers to replace their car regularly without ever having to fork-out a large up-front payment.
This is because there is a lot of confusion surrounding leasing and the terminology that surrounds it.
The benefits of leasing
Famous billionaire oil tycoon, J. Paul Getty was once quoted – “If it appreciates, buy it. If it depreciates, lease it.
The average new car will lose around 60% of its value within just three years of purchasing. The average price of a new car in the UK is now almost £29,000.
Therefore, if you spend £30,000 on a new vehicle today, you can expect it to be worth just £12,000 in the year 2020.
When you take out a car loan or use a car finance agreement, you are paying a set amount each month based on the original vehicle value. The problem is, two years down the line you’re still paying back that money on something that is no longer worth that much.
Property or land on the other hand, increases in value over time, making owning it a much more attractive proposition.
One of the biggest attractions of leasing is that it allows you to drive a car that you may not otherwise be able to afford outright.
You then also have the option to drive a brand-new car every two to four years and benefit from the safety, technology, fuel economy and performance enhancements found on newer models.
The drawbacks of leasing
The obvious drawback of leasing is that you never actually own the asset.
Since you don’t ever own the asset, it gives you no equity. You could therefore argue that in the long-term, leasing becomes more expensive than purchasing the asset.
If you damage the asset during the lease agreement, or the asset requires maintenance you may be responsible for the costs involved. This is why it’s always worth checking the company/owners terms and conditions prior to entering a lease agreement.
Leasing is one of the many ways you can pay for the use of the asset. It is similar to many other methods in that you usually pay in monthly instalments.
The main difference is, you do not own the asset at the end of the agreement. Instead, you simply hand the asset back to the owner.
The main benefit of leasing is that you don’t have to worry about the asset depreciating during the time you’re using it. The main drawback is that the asset gives you absolutely no asset, so you don’t have the choice to sell it once the agreement is over.« Back to Glossary Index