Car Leasing 2 years or 3 years which is best

Which is the best term for a vehicle lease.

Q. Which is the cheapest period over which to take a car on a lease, 2 years or 3 years? I notice that occasionally some cars are cheaper over 2 years then other times 3 years are cheaper for the same car - why is this?

A. This situation seems very confusing but in fact it really isn't. However, it isn't so straight forward to enable me to say that 2 years will always be cheaper or vice versa.

It depends on two main factors, the expected resale value of the car and the discount and bonus given by the manufacturer and the dealer. Some times certain cars perform much better in auction when sold after two years rather than three years. However this effect is normally mild compared to the effect that bonuses and discounts have. Invariably cars that have cheaper 2 year rates also have the greatest discount and bonus.

Let me try to illustrate with an example. As a rule of thumb new cars drop by 30% of their retail price in year 1, a further 20% in year 2 and a further 10% in year 3 making the car worth 40% of its retail price after 3 years. So lets take a car costing £10,000, it would drop £3,000 in year 1, £2,000 in year 2 and £1,000 in year 3. So in the first 2 years the car depreciates by £5,000. If we divide this figure by 24 months the monthly depreciation would be £208.33.

However, after 3 years the car would have lost £6,000 in total, divide this by 36 months and the monthly depreciation would be down to £166.66 so the 3 year rate would be less than the 2 year rate. Obviously interest and other charges would have to be included in the monthly rental but you get the gist.

On the other hand if the car was sold to the leasing company at 40% discount and was therefore bought for £6,000 after 2 years the car is still worth £5,000 so the depreciation over 2 years is just £1,000 divided by 24 the monthly depreciation is just £41.66. However, after 3 years the car depreciates by a further £1,000 making the total depreciation £2,000 divided by 36 months the monthly depreciation is now £55.55. This is a very simplistic calculation but the theory is sound.

The bigger the bonus/discount the higher the likelihood that 2 year rates will be lower than 3 year rates.

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