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Dollar down, Dollar a day. How to choose the best leasing payment profile.

28th Dec 2021

Payment Profiles can make all the difference when assessing a great lease deal. Here is the skinny. (TLDR - Lowest monthly price is not always the best deal)

Leasing payment profiles have been on a journey over the last few years. they started as quite a dry application of finance used mostly for corporate leasing. A few years ago the revolution in personal leasing started to happen and suddenly Personal Contract Hire (PCH) got REALLY popular.

This led to a change in the marketing approach, from the old Lease Co's (Who were great at managing large fleets of leased vehicles but not so good at consumer marketing) to the emerging Brokers (Who are incredible at marketing and proposition building). This change in approach was fuelled by the competition in the broker market and the need to present the lowest pricing for monthly rental payments. Adjusting payment profiles is one of the ways in which the lowest monthly rentals can be achieved (There are others such as Mileage, Contract Length and Maintenance packages which we will cover in separate posts). But here's the thing, lowering monthly rentals does not always mean lowering overall cost, I'll explain.

So to start from the beginning, the standard was a 'Terminal Pause' which was the total rental amount divided by the number of months of the contract (Simples!). This took the form of a payment up front (Usually 1 month or 3 months) followed by the remaining payments. This left a 'Pause' at the end of the contract of 1 or 3 months with no payments to pay (You paid them at the front).

Example of Terminal Pause

  • 36 month contract
  • 3 rentals in advance (followed by)
  • 33 monthly rentals (Starting month 1 and ending month 33)
  • Months 34, 35 and 36 no rentals are due.

So, if we took a simple 36 month rental with a rental amount of £36000 (It's going to be a pretty nice car for that!) , we would see £3000 in advance rentals and 33 payments of £1000 per month

"But here's the thing, lowering monthly rentals does not always mean lowering overall cost, I'll explain".

The other standard was a 'Spread Rental' the same thing basically with a payment up front (Usually 1 month or 3 months) but with no 'pause' at the end. This lowered the monthly rental as the remaining rental amount is spread over a greater number of payments (23, 35 or 47 payments usually).

Example of Spread Rental

  • 36 month contract
  • 3 rentals in advance (followed by)
  • 35 monthly rentals (Starting month 1 and ending month 35)
  • Month 36 no rentals are due.

Using the same example as above with the Spread approach, we can see that there would be the same £3000 rental in advance but then the monthly rentals would reduce to £942.85. (in reality it may slightly more than this as there may be a little more interest to pay). But we see the impact of the monthly rental.

So now a headline rental of £942.85 can be used, which compares favourably with £1000 and so thats the way the broker industry went, using larger advance rentals to drive down headline rates for marketing purposes.

Why? I hear you ask. Because it works, thats the way us humans are wired and we respond to something we can compare (i.e monthly rental) even though lots of different things could be driving it. (Mileage, Length of contract, specification and advance rentals) Lowest price is not always the best deal. To prove this I'll leave you with one final example of a spread rental

Example of Extreme Spread Rental

  • 36 month contract
  • 12 rentals in advance (followed by)
  • 35 monthly rentals (Starting month 1 and ending month 35)
  • Month 36 no rentals are due.

You have the idea by now. The initial rental is £12000 and the 35 monthly rentals are now just £685.71 (It may be a little lower as you will be paying less interest due to the large initial rental). If you were comparing this with the initial figure of £1000 per month (and hadn't read this blog) you may have got pretty excited at this 'awesome' deal but ballpark, you would be paying about the same. You would however have £9000 less liquid cash in your bank, or your investment account or well, you get the idea.

Of course paying a large initial payment can be the smart move for some people. If you are cash rich and value the lowest monthly payment and understand the total cost of ownership concept then go ahead, it's right for you. If these things don't apply then maybe a focus on the right initial rental amount to start your search is the right way to go and then a fixed stare on the TOTAL cost rather than monthly rental route where most people start, (but shouldn't finish!)

"You may have got pretty excited at this 'awesome' deal, but ballpark, you would be paying about the same."

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