Will car lease prices go down in the UK?

It’s the question on every car buyer's lips: will car lease prices go down?

And naturally, therefore, is now the right time to place my order?

No one wants to pay more than they have to. Whether that's for a tank of fuel, the car itself, or a Freddo bar for the journey. 

Unfortunately, our wonderful pricing analysts will be the first to tell you that car lease pricing isn’t simple or predictable.

I know. I heard your gasp of surprise from here.

There are so many contingent parts that can impact car lease prices and as a leasing broker we’re smack bang in the centre of that wild hurricane.

Thankfully, we have some hugely skilled experts in our ranks whose day job is to predict pricing trends and secure our customers the best lease deals. They're our not-so-secret weapon and we’re delighted to share their insights with you.

Read on to learn what contributes to the cost of a lease car and how this has impacted car lease prices over the last few years. Most importantly, see us pit our predictions for the future.

And, don't say I didn't warn you, you're in for the long haul. 

Fetch a nice cup of tea, strap yourself in, and let's get going.

Want to watch instead of read our verdict? Just head to our YouTube channel.

What impacts car lease prices?

Before we can investigate whether car lease prices will go down, we must understand what contributes to the cost of a car lease in the first place.

Five main things impact car lease costs, and we'll tackle each of these in turn.

• On the road price (OTR)
• Depreciation curve
• Interest rates
• Vehicle taxation
• Broker discounts

OTR and car lease prices

What you pay for your lease car starts with how much manufacturers want to charge for the car itself. This is what we call a 'list price' and is the equivalent of the recommended retail price (RRP) we are used to from our high-street shops.

Car manufacturers are a law unto themselves when deciding their list prices. 

But they'll consider the cost of producing, transporting and marketing the car and what profit margin they need to bolt on top. Market conditions, competitor activity and supply/demand will all impact this.

List price then forms a big part of the On The Road Price (OTR) of the vehicle. This figure combines everything you pay in order to drive away the car: the list price plus delivery charges, registration fees, number plates, fuel and one year’s road tax. 

It's the OTR that is the start of your car lease cost calculation.

Manufacturers don't change their list prices very often, but they do engage discounts that affect a car's OTR - these can come at any time. We'll get onto how brokers can influence this cost later on.

How does OTR differ to P11D?

It’s important to note that your car’s OTR will differ from its P11D value. To calculate P11D you only consider list price and delivery charges, ignoring the additional upfront costs that create the OTR.

Any discounts applied to the list price won't apply to the P11D value. This means the P11D could be greater than the OTR even though it consists of less component parts.

Why do we need them both? P11D values are crucial to consider with a business car lease as it is this value that is used to calculate company car tax.

Past, present and future OTR

As the biggest chunk of your car lease cost, anything impacting OTR will have a big impact on prices.

It's not news to anyone that the COVID-19 pandemic and international wars have caused production delays and price increases for automotive manufacturing. If a car costs more to build, we'll be forced to pay more to take it home.

The opposite is also true. 

Manufacturing and transportation efficiencies can drive down costs which are often reflected in OTRs. That's why emerging brands such as BYD are able to deliver a premium product at lower costs than competitors like Tesla.

Changing consumer behaviour also has its impact. We've seen appetite for cars change massively over the last few years and this tussle between supply and demand has caused an inevitable shift in the OTRs available too.

In a period where production stalled and demand was still high (2020), car lease prices rose. As factories have caught up, we are now in a position where supply largely outweighs demand and are therefore now seeing OTRs and car lease prices drop (2023).

We're sure you heard about Tesla's infamous price drop at the start of 2023. 

This is just one case in point and shows manufacturers are now having to adjust their list prices, and therefore OTRs, in order to remain competitive.

Rules of Origin tariff

The Brexit agreement of 2020 temporarily agreed an exemption to a 10% tariff on products that aren't substantially made in the UK or EU.

To show you just how quickly things change: when I started writing this piece, this exemption was due to end in January 2024 and would see a significant uplift in vehicle OTRs as a result.

But, to a sign of relief from all involved, this has now been extended until 2027. Therefore, a big source of car price increases in 2024 has been narrowly averted.

What does this mean for car lease prices?

The most recent government update suggested a steadying of public finances and an avoidance of the recession they anticipated. Improved inflation figures usually acts to increase consumer confidence and spending, shifting the supply and demand balance once again.

For this reason, we see the next few months as a great time to order your lease car. 

Prices tend to be falling to reflect low demand and high supply. But with green shoots of economic growth on the horizon, and with strain still on production lines, vehicle demand is expected to increase into next year. 

And this is bound to be reflected in how manufacturers scale the list price of their cars.

Depreciation and car lease prices

It’s one of leasing’s USPs – you are only funding the depreciation of the vehicle rather than the full vehicle cost. 

Financing a smaller sum means you’re paying less interest for the same product. 

This is one of many ways that leasing differs from PCP and other car finance products, and it keeps monthly payments lower.

Depreciation describes the difference in value of your car at the point you take delivery compared to when you hand it back at the end of your lease. The car's value at the end of your lease is what we call its residual value.

Age, mileage and vehicle condition will all impact this, which is why you need to agree to these terms before you take on your lease contract.

What you pay for your car lease will be dependent on the difference between the car’s OTR as set by the manufacturer, and the residual value predicted by the funder.

They will therefore be immensely clever people and tools in charge of calculating residual values. And as the official owners and the ones who will need to sell the car on at the end of your term, it’s a critical element for funders to get right.

As with OTRs, funders can change their predicted residual values without notice and this affects advertised prices for browsing customers. 

But it is important to note that whether the funder is accurate in their residual value prediction at the end of your lease or not, your monthly payments won’t change.

This is one of the many benefits of car leasing - depreciation risk is not your concern!

What impacts car depreciation? 

There are standard, quantifiable depreciation metrics that we are all used to when choosing cars (such as age, mileage, service history, number of owners and condition) that all ultimately speak to a car's desirability based on appearance, perceived reliability and minimizing repair costs.

However, a car’s residual value can also change based on things like brand popularity, safety ratings, industry compliance and new releases. 

An emissions or recall scandal for a manufacturer can impact the residual value of their cars. Likewise, a new model release or facelift will impact the value of any previous iterations.

Ask yourself 'does this make the car more desirable to another buyer?' and therefore 'how easy will it be to sell the car on?' and that generally answers the question of what impacts depreciation.

This leads us back onto the manufacturers' set list price.

As per our Tesla example earlier on - if the list price of a model drops, this slashes the residual value of the cars already on the road too. If you can get hold of a new car for not much more than a used one, we know what we'd pick.

That's a problem if you're a funder, or if you bought the car. But if you've leased? You can thank your lucky stars you were just that clever!

Vehicle depreciation also happens more starkly in the first few years of car ownership. That's why considering a longer lease can see disproportionate savings on your overall monthly payment compared to a short-term car lease.

What about electric cars?

Electric car depreciation is highly debated in its own right, and for good reason.

New EVs are increasing in popularity, especially considering the 2035 ban on combustion cars. 

However, new models and improving technology are arriving at pace (from the likes of Genesis, Polestar and Fisker to name a few). This means EV models in particular outdate and therefore depreciate quickly, particularly in the luxury segment.

What does this mean for car lease prices?

Most of the time, our panel of funders calculate residual values at regular intervals - either monthly or quarterly - and our pricing team use our network of systems to undergo a complex car lease comparison when this happens. Enabling us to advertise only the lowest rate available for each vehicle, regardless of who is offering it. 

However, it isn't always that simple. Sometimes an unexpected residual value shift affects live prices immediately. This could be up or down, meaning lease prices increase or decrease accordingly.

Where residual value updates are anticipated and we're expecting this to mean a price increase, it is possible to let existing enquirers know and we do so where possible.

This is one of the reasons that car lease prices fluctuate most at the end of each quarter. And why carefully choosing when you look for your next car is one of our top tips for finding the best car lease deal.

Bonus tip: to protect against sudden price increases, it is important to request a quote on your chosen vehicle. 

This goes some way to protecting us and you against price changes as funders are often obliged to honour quoted prices within a limited timeframe, subject to terms and conditions.

Does this mean car lease prices will go down?

It's well documented that the used car market has been in a tumultuous state of late.

Where depreciation curves have historically been largely predictable, the pandemic saw a period where a sudden lack of supply meant some used cars were being sold on for more than the owner paid for it in the first place. As supply has increased again, used car values have plummeted and therefore so have residual values on lease cars.

This is expected to return to pre-pandemic normality by 2026. 

However, those of us who need a new car in the meantime are likely to pay more for the privilege regardless of how we choose to pay for it.

Interest rates and car lease prices

If you have a mortgage, or any sort of loan, these are two words that will currently send a shiver down your spine or an angry shake up your fist. 

So we'll keep it quick.

Interest is what you pay when borrowing money. Whether that be for a house, for a car, or for that new jacuzzi you've always wanted (just me?). 

Car leasing is no different.

It also dictates the return you'll get on any money you have saved away.

Interest rates do differ depending on where you borrow from, but the Bank Rate (sometimes known as the base rate) is the most important. 

Set by the Bank of England's Monetary Policy Committee (MPC), this bank rate goes up or down depending on the state of the UK's economy in order to minimise inflation. And when the bank rate changes, so do the charges faced by lenders and they will follow suit with their own interest rates.

Following record lows of the Bank Rate from 2020 - 2022, it is now back over 5%. This is the highest it has been since October 2008.

Does this mean car lease prices will go down?

For as long as it costs more for providers to borrow money, they'll charge more to lend to us.

Interest rate fluctuations are hard to predict, but they are closely related to the health of public finances. As UK economy appears to be steadying, the need for another base rate increase appears unlikely.

We actually expect interest rates to fall gradually throughout 2024 and 2025. 

However, this won't undo the sharp increase we've experienced in recent months and won't reach the lows of the last few years for quite some time.

What we do know is that borrowing less means you'll be subject to smaller interest charges. And leasing is a way into a new car while borrowing less to do so.

Vehicle taxation on car lease prices

Vehicle excise duty (VED), otherwise known as car tax, is included in your car lease price at the prevailing rate. Therefore, VED changes will inevitably impact car lease prices. Both at the point of order but also if legislation changes during your lease.

How much you'll pay for the first year of road tax depends on the car's CO2 emissions. 

Thereafter, your annual charge depends on fuel type. Additionally, cars with a list price of over £40,000 are subject to an annual standing charge for five years following the first tax payment.

The Autumn statement outlined increases to car tax coming in April 2024. 

Unless there are registration date exemptions, which aren't expected here, this increase is inevitable however you fund your car and is inescapable whenever you decide to place your order. Any uplift will be passed onto those with an existing car lease too.

Electric vehicles are currently exempt from these car taxation measures, but this is due to end in 2025. Zero emissions vehicles registered on or after 1 April 2017 will then be liable to pay the lowest first year VED rate and the standard annual rate thereafter. 

The expensive car supplement exemption will also end at the same time, meaning EVs with a list price of over £40,000 will face the additional annual charge too.

Company car tax

Although not included in the monthly payment for your car lease like VED, company car tax or Benefit in Kind (BiK) is important to consider for those driving for work as it is an inevitable associated cost.

This is a tax charged on business vehicles when they are also used for personal journeys, making the car an employment benefit. 

BiK is calculated in bandings based on CO2 emissions, P11D value and pure electric range.

The UK government's 2022 autumn statement confirmed BiK rates until 2028 for cars registered after April 2021. Most prominently this saw a hold on the current 2% BiK rate on low and no emissions vehicles until 2025. Charges will then increase by 1% per year until reaching 5% in 2028.

Want to find out what your BiK bill will be? Use our handy company car tax calculator.

Does this mean car lease prices will go down?

VED changes already announced will see car lease prices rise. No matter when you order your car, or how you pay for it, this increase is coming.

Changes to vehicle taxation is likely to hit EV drivers more harshly, as they're currently used to exemptions.

Broker discounts and car lease prices

Now for the fun bit.

While the vast majority of the car lease prices debate is out of our control, this is our time to shine.

We're one of the lucky ones and are a broker with access to a wide panel of funders, and therefore a greater catalogue of rates (in the millions).

Generally speaking, brokers with access to the same funders also have access to the same stock and the same lease rates. The only way to distinguish themselves on price is through reducing their commission.

But we're different.

We have a proven track record and our own funding stream. So, we are in the fortunate position to influence the OTRs we discussed at the head of this piece.

Enter our shining star on this subject: the master of securing stock at great value, our Operations Director Matt Woodward.

He comments, "Leasing is a volume market, and wherever you have volume you have cost efficiencies. This is our bargaining chip to achieve prices and stock levels you won't see anywhere else.

"This partly comes from our access to an unlimited catalogue of manufacturers, as we are not limited by location or vehicle brand. This fuels competition, and allows us to negotiate set batches of stock and discounted prices based on our relationships with these providers and our ability to increase their sales at scale.

"Committing to sales volume and being liable for the costs if we don't achieve it enables us to achieve incredible rates that you won't find anywhere else.

"The most successful partners engage with us throughout the year to ensure volumes are steady.

 "However, we tend to be most successful in our stock and OTR negotiations at quarter ends, and particularly year ends. This is because all of the businesses in our supply chains have sales targets to hit, and we are often their conduit to achieving them."

Ever wondered how adding another profit-seeking party to the mix actually saves you money? 

It's not the smoke and wizardry it can appear to be (putting my hand up to this thought train before I joined the industry). We hope this clears up some of the broker mystery.

The rise of pre-registered cars

This is also when pre-registered cars come into their own. 

A pre-registered car has been registered to the dealership to achieve registration targets. While a customer gets a cut price for what is essentially still a new car, dealerships subsidise this loss of income with the income from hitting their targets.

Why isn't everyone doing it, then? 

Well, there are potential warranty implications, so it is important to understand the pros and cons of a pre-reg car.

The rise of the pre-reg offering is particularly prominent on EVs right now as manufacturers face significant penalisations for exceeding annual emissions targets. Across all their registered cars, EU fleets must now hit a target of 95 grams of CO2 per kilometre or face a 95 euro fine per registered car. 

Which, in no uncertain terms, could be massive!

Volkswagen lead the way and have registered around 150,000 vehicles this year. Missing their target could mean a whopping £14million fine. 

Our eyes are watering just thinking about it.

Does this mean car lease prices will go down?

The rumours are true. 

Leasing a car around the end of the quarter, particularly in times of slow sales, could see you benefit from significant cost savings.

Not just because of the anticipated residual value reviews we've mentioned, this is also because providers are under increased pressure to hit sales targets. This influences their standard OTRs and encourages a rise in great value pre-reg deals, but also means they are more likely to engage with brokers on exclusive discounts.

Price reductions are heightened again while car makers are under pressure to register more electric cars in order to hit emissions targets as well. 

Therefore, expect significant work to be done on making an electric car lease more appetising both now and in the future.

Will car lease prices go down?

If you've made it this far, we salute you. And we hope you've enjoyed the ride.

On the plus side: fights to achieve volume and emissions targets while demand is low is forcing manufacturers to consider their OTRs and drive value in the immediacy. 

Plus, interest rates are expected to gradually fall. Outside of EV, depreciation is generally predicted to become more stable. Therefore, residual values are likely to improve. 

We've also averted costly Brexit-fueled production tariffs.

On the down side: a steadying of the economy is likely to see OTRs increase into next year. The speed of development within the EV market will still put strain on their residual values and chip away at the value provided by lowering upfront costs. 

Vehicle taxation is also expected to increase from April. 

In summary

All things considered, we know the cost of car ownership remains high. 

As we approach the end of the year, we are seeing lease car prices go down and economic recovery drives positivity for borrowing. But, overall, car lease prices (and car prices generally) are likely to go up in the UK over the coming months.

However, because of the savings made through borrowing less, the security over residual values and the power of brokers to reduce OTRs, if you're looking for a new car, leasing is a great option. 

And getting in quickly could save you £££s.