Understanding Lease Terms: What Do All These Leasing Terms Mean?

Understanding Lease Terms: What Do All These Leasing Terms Mean?

Leasing a car or van is a fantastic way to drive a new vehicle without the commitment of ownership, but understanding the language used in leasing can feel like learning a new vocabulary! From BCH and PCH to residual value and initial payment, each term can impact your lease experience. This guide simplifies commonly used terms in car and van leasing, so you can make an informed decision with confidence.

Why Knowing Leasing Terms Matters

When you’re familiar with basic leasing terminology, navigating the leasing process becomes much easier. You’ll know what to expect in your contract and understand how terms affect factors like monthly payments, the end-of-lease process, and any extra costs. Here’s a breakdown of key terms to help make the leasing experience smooth and stress-free.

Key Car and Van Leasing Terms Explained

1. Initial Payment

The initial payment is the upfront amount you pay when starting a lease. It’s typically equivalent to 1, 3, 6, 9 or 12 monthly payments. A higher initial payment will lower your ongoing monthly lease cost, while a lower upfront payment will mean higher ongoing monthly payments. The initial payment makes up part of the overall cost of the lease and is not refundable.

2. Monthly Payment

This is the fixed amount you pay each month for the duration of your lease. Monthly payments depend on the vehicles price, residual value, initial payment, contract length and annual mileage. It’s the primary cost you’ll budget for over the lease period.

3. Business Contract Hire (BCH)

BCH is a leasing option designed for businesses, allowing them to lease a vehicle for a set period in exchange for fixed monthly payments. VAT-registered businesses may reclaim part or all of the VAT on the lease payments, making it a tax-efficient choice for business owners.

4. Personal Contract Hire (PCH)

PCH is a personal leasing option for private individuals. It allows you to lease a vehicle for a fixed term without the obligation to buy. Like BCH, you pay a monthly fee, but VAT cannot be reclaimed on PCH agreements.

5. Residual Value

The residual value is the estimated worth of the vehicle at the end of the lease. It’s calculated based on factors like the vehicles depreciation rate, contract length and annual mileage. The residual value isn't usually disclosed on a Contract Hire agreement since you won't have an option to own the vehicle, however it is still used by the funders to calculate monthly rental costs.

6. Depreciation

Depreciation refers to the loss in value of a vehicle over time. It’s one of the key factors influencing lease costs, as your monthly payments cover the car’s expected depreciation. Cars with lower depreciation rates generally come with lower lease payments.

7. Excess Mileage Charge

If you exceed the agreed mileage limit on your lease, you’ll pay an excess mileage charge at the end of the lease. This fee is usually calculated on a per-mile basis, so be realistic about your expected mileage to avoid unexpected costs. Excess mileage charges vary from funder to funder and cannot be negotiated.

8. Mileage Allowance

Mileage allowance is the maximum number of miles you’re allowed to drive annually without incurring excess mileage charges. The minimum annual mileage with most funders is 5,000, with the maximum usually being 30,000. You can select a figure anywhere between the two to suit your requirements.

9. Maintenance Package

Leasing companies offer an optional maintenance package covering the cost of routine services, tyre replacements, breakdown cover and MOT's. It’s an added cost but can provide peace of mind and predictable budgeting for maintenance expenses.

10. Fair Wear and Tear

Fair wear and tear refer to the expected level of damage that occurs during normal use, such as small scratches, dents or chips to certain parts of the vehicle. All of the main UK leasing funders adhere to the BVRLA's Fair Wear and Tear Guide when assessing vehicles at the point of return.

11. Early Termination Fee

If you want to end your lease early, you may be charged a early termination fee. With most funders, the early termination fee is 50% of the balance remaining on the lease and excess mileage charges will be worked out pro-rata. You could also still be charged for any damage outside of fair wear and tear.

12. Lease Term

The lease term is the agreed length of time you’ll be leasing the vehicle, which can range from 18 - 60 months. A shorter lease term generally means higher monthly payments, while longer terms may offer lower monthly costs.

13. End-of-Lease Options

At the end of your lease, you have options for your next steps. The most common choice is to change to a new vehicle, however if you are happy with your current lease vehicle you may be able to extend the contract.

Putting It All Together: Choosing a Lease with Confidence

Leasing terminology might seem complex, but knowing these terms can help you confidently choose the right car or van lease. Whether you’re opting for a personal lease (PCH) or a business lease (BCH), understanding terms like initial payment, monthly payment, and mileage allowance makes it easier to find a lease that fits your needs and budget.

At Lincoln Vehicle Solutions, we’re here to answer any questions about leasing and guide you through each step. Get in touch to explore the best leasing options and find the perfect car or van for your lifestyle or business needs!