What you are actually paying for
When you lease a car on contract hire you are not paying for the whole car. You are paying for the part of its value that disappears while you have it, plus the cost of the finance behind it and the funder's margin.
That is why a lease can look cheap next to a loan on the same car. You never pay off the full price, because you hand the car back at the end. It is also why the monthly figure alone says little about value, since what matters is the total you pay for the period you have the car.
The how it works page walks through the structure of a contract hire agreement if you want the basics before the numbers.
What drives the monthly rental
Six inputs account for most of the rental. Change any of them and the figure moves, which is why two quotes for the same model can differ.
- Price of the car: the list price after any discount sets the starting value the funder has to recover.
- Depreciation: the gap between that value and what the funder expects to sell the car for at the end. This is the biggest part of the rental, and cars that hold their value well cost less to lease.
- Term: a longer term spreads the cost over more payments, but later years can add servicing risk for the funder.
- Annual mileage: more miles means lower expected resale value, so the rental rises with the allowance.
- Initial rental: a larger upfront payment reduces the remaining payments, though not the total.
- Interest: the funder's cost of money, applied to the value it has tied up in the car for the duration.
The costs that sit on top
A contract hire rental normally includes the car and, on most personal and business deals, the vehicle excise duty (VED) for the term. Many quotes make this clear, but it is worth confirming what the rental covers and what it does not.
Insurance is separate unless the agreement bundles it, and you must insure the car comprehensively with the funder noted as owner. See the guide on whether car leasing includes insurance for what bundled cover can and cannot do.
Fuel or charging is yours to pay. The fuel and charging cost calculator turns your mileage and the car's efficiency into a running cost, and the fuel prices page shows the current pump price.
- Maintenance: only included if you chose a maintenance package.
- Tyres: usually your cost, and replaced to the standard the agreement requires.
- Excess mileage: charged in pence per mile above your allowance at the end.
- Damage beyond fair wear and tear: charged on return after inspection.
- Early termination: a large charge if you end the agreement before the term finishes.
An illustrative worked example
The figures below are invented round numbers to show how the maths works. They are not a quote, and real rentals depend on the car and the funder.
Imagine a car worth £24,000 that the funder expects to be worth £12,000 after three years. The depreciation it must recover is £12,000. Add an illustrative £2,400 for finance cost and margin, and the amount to be repaid through rentals is £14,400.
Spread across 36 payments that averages £400 each. If the contract has a first payment of six times the monthly rental, the regular rental falls, because the same £14,400 is split into a larger first payment and smaller later ones. In this simplified version the structure changes the shape of payments, not the sum, which is the point to carry into real quotes.
Now add the running costs for the same imaginary driver. With an illustrative £900 a year in extra servicing and tyres, insurance of £1,100 a year and fuel of £1,500 a year, the three year bill for those items is £10,500. Together with the £14,400 of rentals, the total outlay is £24,900, or about £692 for each of the 36 months. That is far above the £400 average rental, and it is the figure that belongs in a comparison with other ways of running a car.
The numbers are deliberately round and the real mix will differ, particularly for electric cars, where charging at home can cost less than petrol and insurance can cost more. Replace each line with your own estimate and the method still works.
| Item | Illustrative figure | Note |
|---|---|---|
| Car value at start | £24,000 | Round number for the example |
| Expected value after 3 years | £12,000 | Funder's estimate, not a prediction |
| Depreciation to recover | £12,000 | Start value minus end value |
| Finance cost and margin | £2,400 | Illustrative |
| Total to repay | £14,400 | Over the full term |
| Average payment over 36 months | £400 | Total divided by 36 |
How term and mileage change the picture
A shorter term makes the rental higher, because the same depreciation is recovered over fewer payments and the early period is when cars lose value fastest. A longer term lowers the rental but ties you in for longer and moves the car further from the manufacturer warranty.
Mileage works the other way round. A higher annual allowance means the funder expects a lower resale value, so the rental rises. Choosing a lower allowance than you really need is false economy, because the excess mileage charge at the end is billed per mile and can wipe out the saving.
Use the excess mileage calculator to test what a few thousand extra miles would cost at a given pence-per-mile rate before you pick an allowance.
A second illustration shows the mileage effect. If the funder's pricing assumes 8,000 miles a year and you drive 12,000, you cover 4,000 extra miles a year, which is 12,000 over a three year term. At an illustrative excess rate of 8 pence per mile, that is a bill of £960 at the end. A higher allowance at the start would have raised the rental, usually by less than the end charge for the same miles, which is why honest forecasting pays.
How to compare total cost fairly
The only like-for-like measure is the total you pay over the term, plus the extras you will definitely incur. Rentals alone mislead, especially when initial rentals differ between quotes.
Work through the same steps for every quote so nothing is missed. The true cost of leasing tool does the arithmetic for you once you enter the initial rental, monthly rental and fees.
- Multiply the monthly rental by the number of rentals, then add the initial rental if it is separate.
- Add any admin, documentation or delivery fees and the maintenance package if you want one.
- Add your estimated insurance for the term and your expected fuel or charging spend.
- Add a realistic allowance for excess mileage and end-of-lease charges.
- Divide the grand total by the number of months to get a true monthly cost.
Checks before you commit
Ask whether the quoted rental includes VED, whether the funder charges a documentation fee, and exactly how the initial rental is expressed. A quote of "3+35" means three rentals upfront and 35 afterwards, which is a different cash flow from "1+35".
Check the mileage allowance and excess rate in the contract, and read the condition standards for return. Many agreements follow the BVRLA fair wear and tear guide, but your own contract is what counts.
Finally, check whether you are dealing with a broker or a funder, and whether it belongs to a trade body such as the BVRLA. For comparing against other routes to a car, the lease vs PCP vs buy tool puts them side by side.
It also helps to ask what happens to the figures if you change the term. Ask for the same car priced at 24, 36 and 48 months with the same mileage and initial rental. Laying the three side by side shows the real cost of flexibility, and often shows that a longer term saves less than expected once you allow for the extra year of servicing and tyres.
Common mistakes when estimating lease costs
Most overspending on leases comes from a handful of avoidable errors rather than from the headline price. Each is easy to make because a quote is built to show one number, the monthly rental, while the real cost is spread across several documents and several years.
The list below is worth running through before you accept any quote. Each item can add hundreds of pounds, and none of them appears in the headline figure.
- Comparing monthly rentals without allowing for different initial rentals, which makes a high-upfront quote look cheaper than it is.
- Choosing a low mileage allowance to shave the rental, then paying excess charges at the end.
- Forgetting insurance, which for young or new drivers can be a major part of the cost.
- Assuming maintenance is included when it is an optional extra, or assuming it is excluded when it is bundled.
- Ignoring end-of-lease condition standards, and discovering charges for wheel scuffs, dents and worn tyres on return.
- Overlooking documentation or administration fees that sit outside the quoted rental.
- Treating a lower rental on a longer term as a saving without considering what happens if you need to leave early.
- Forgetting that a lease leaves you with no asset, so any comparison with buying must include what a purchased car would be worth.