Depreciation and Equity - Leasing Myths Debunked

By Ronnie Lawson-Jones
13-07-2018

One of the biggest leasing myths we encountered and get asked about all the time is that car leasing is ‘dead money’ and akin to renting a house and paying for someone else’s mortgage. Well, we’re here to finally put an end to this myth with some simple maths and to explain how leasing works in terms of the car’s depreciation, equity and lack of ownership. Let’s begin!

Depreciation costs

When leasing a vehicle you are effectively paying for the depreciation of a vehicle over the time you are lasing it for. The AA estimates that a vehicle will lose around 40% of its value in the first year and if you have driven 100,000 in 3 years it will lose around 60%. These are some massive numbers to consider if you want to buy your car.

So let’s consider this, we have a deal as of 10/07/2018 for a SEAT Leon 1.4 TSI Technology 5 door for £206.64 a month, over 48 months with an initial payment of £1859.76. This equates to £9,092.16 lifetime cost. This is for 10,000 miles a year.

The retail price for this car on SEAT’s website is £21,430, after 3 years based on AA’s calculation your SEAT Leon FR Technology will have lost 60% (or more!) of its value (40% in the first year) which equates to £21,430 not counting any APR if you have it on PCP (6.4%) which would be roughly £1050.07 on top.

To recap to the two options:

Lease

Initial Payment of £1859.76

35 Monthly Payments of £206.64

Total Repayable: £9092.16

Car value after three years: £12,858

PCP

Deposit: £1,050 (£2250 from SEAT)

35 monthly payments of £359.01

You will have paid £13,615.35 in 3 years and still won’t own the car

Total repayable: £23,010.55

Car value after three years: £12,858

As you can see from the example the car through a PCP has negative equity and you will have paid £13,615 fora car you don’t own as opposed to £9,092.16 which is a difference of £4,522.84 if you had leased it.

Imagine what you could have done with that £4,522! That’s enough for a luxury family holiday, half of another SEAT Leon lease, a jacuzzi, a new kitchen or a bathroom.

If you, for whatever reason, decided to pay the balloon payment to own the car then you will have purchased a £12.8k car for £23k and you will have to wait a very long time to ever see the £10,000 difference ever again.

Equity

Equity is a phrase to describe the value between an asset (car) and the finance (lease, PCP). With a lease there is no equity as you have no asset but with a PCP there is equity if you opt to buy it, if you don’t opt to buy it then you’ve just leased at a higher cost and with interest and should never have chosen PCP.

In the previous example with the Leon, the car has reached negative equity as the value of the car is now less than the finance that’s left on it by quite some margin.

Never worry about negative equity or depreciation costs with a lease.

Leasing is like renting a house

One of the phrases people like to use with leasing is that “leasing a car is like renting a house” where your money is paying for someone else’s mortgage or it become ‘dead money’. The key difference here is that car and a house do not depreciate at the same rate, if at all, as often a house may increase in value whereas a car will never.

This is because a house is brick and mortar and will never change. A house can adapt and modernise over time by the owner but a vehicle will not. A vehicle’s engine and interior technology will become outdated, the exterior will become damaged and the repair costs build up quickly. Although a house still needs some TLC from time to time it will never be at the same extent as a car will.