Operating Lease: What is it and how does it work?

Similar to Personal or Business Contract Hire (PCH or BCH), an Operating Lease (OL) is an affordable and flexible way for you to get behind the wheel of a brand-new car, without the upfront cost of buying it.

You’ll take out your Operating Lease for a fixed term (normally between two and four years), and your monthly payment will depend on how long the contract is, your annual mileage and your initial deposit.  

However, with an OL, only the first 12 months Road Fund Licence (otherwise known as road tax) is included. This will start from just before the car is delivered to you, so rest assured you won’t be paying for the time between order and delivery.

You’ll be responsible for paying road tax after the initial year, because the V5C is sent to you, rather than your funder. This doesn’t mean that at any point you’ll own the car – the finance company will still own it – but having the logbook can make life easier for you.

Admin bits that normally have to be run through your funder – like permit arrangements, plate transfers, taking your car abroad – can be much easier when you have the logbook. And at the end of your contract, you still return the vehicle and can take out a new car lease without worrying about depreciation or the faff of selling the car.

What’s the difference between an Operating Lease and Personal or Business Contract Hire?

There isn’t much difference between an Operating Lease and Personal/Business Contract Hire.

The main difference is that with an OL, you get sent the V5C, whereas with a PCH or BCH agreement, your funder keeps the V5C – which means you can manage bits like fines and number plate changes yourself, without having to always go back to the finance company.

All the other areas of the lease stay the same. You still choose the length of your contract, your annual mileage and your initial payment, and you’ll still be subject to the same fair wear and tear guidelines and excess mileage charges at the end of your OL agreement.

You’ll also be responsible for insuring, servicing and maintaining the vehicle, although you can add a maintenance package to your Operating Lease which can make budgeting for those pesky unexpected costs much easier.

And just like with PCH and BCH, at the end of your OL you simply hand the car back to your funder, and move on without any faff. You’re free to take out a new lease – which means getting behind the wheel of the latest cars every two to four years, and always benefitting from the latest technologies.

Is an Operating Lease right for me?

If you want the ease of being able to swap in and out of a brand-new car every two to four years without the worry of depreciation or the hassle of selling, getting your next car on an Operating Lease could be the answer you’ve been searching for.

Sure, you’ll never own the car, but if you’re not fussed about ownership and want the ease of being able to swap in and out of brand-new models, then you’ll have no issues.

And with a multitude of benefits – including fixed monthly payments for easier budgeting, flexible terms and being able to access the latest technologies – there’s really no downsides. 

It’s also an excellent choice for your next business lease if you’re looking to drive the latest and greatest models. 

If you choose an OL as your finance method, you can reclaim 50% of the VAT if you’re VAT registered and use the car for business and personal journeys, or 100% if the car is solely used for business purposes. 

You can also reclaim 100% of the maintenance costs if you take out a maintenance package as part of your OL agreement, and up to 100% of the rental cost can be offset against your taxable profits.

However, if ownership of the car is important to you, you know you might need to change the vehicle before the contract is up, or you don’t want to organise RFL in the second year and beyond, then an Operating Lease might not be the right choice for you.

What happens at the end of my Operating Lease?

When your Operating Lease comes to an end, your funder will arrange to collect the car.

They’ll assess the condition of the car according to the British Vehicle Rental and Leasing Association’s Fair Wear and Tear guidelines, and any damage that falls outside of this can incur excess damage charges.

If you go over your annual mileage, you could also face excess mileage charges because the additional mileage affects the depreciation price of the car, which was set at the beginning of your agreement and covered in your monthly payments.

However, if all is good and well, you simply hand the car back to the driver, wave goodbye, and you’re free to move on to a new car – however you’d like to fund it.