Benefits of Contract Hire and Leasing
Contract Hire
Consider contract hire as you would if you were hiring a car for the weekend. It works in a very similar way, but just for a longer period, normally 24 to 36 months. No hassle, just pay the rent and drive the car!
24 months is now considered the minimum term you can contract hire a vehicle for although there are a few exceptions and some specialist companies offering 3 to 12 month agreements.
If you believe contract hire is a guaranteed way of lowering your motoring expenses then you might be mistaken. It can be, if you choose wisely but it’s not necessarily the case. You have to choose carefully.
It is however, a way of fixing the costs of your motoring into one simple monthly payment. You also are able to make an informed decision before you acquire the vehicle, negating you of any associated risks such as depreciation and unexpected repair bills. Whilst in the UK we have grown up with the idea of “ownership is king”, it has long been considered in the US that leasing is a better alternative and gradually people’s perception in this country is changing to accept that leasing or contract hire is a viable alternative to vehicle ownership. Any new car will depreciate (with very few exceptions). If you buy a new car, no one fully knows how much a car will depreciate in the time you own it, meaning you take on that risk and may be subject to high depreciation costs. The cheaper mass produced cars that quite often offer big savings initially may end up costing you more in the long run as they depreciate faster and worth less when you come to sell it on. By choosing contract hire as a way of funding your motoring you are able to establish the true cost of using that vehicle for the term and mileage you have chosen as the contract provider takes full responsibility for the vehicle at the end of the agreement. You just hand the vehicle back. Choose wisely and you can get a real bargain. This is achieved by finding a car with monthly rentals that are disproportionate to the vehicle’s capital cost. Special offers come up from time to time where vehicles are financially supported to aid their sale. If the support is high and the residual value strong = the perfect recipe for a great deal.
For business users running multiple vehicles the advantages are far reaching, offering significant savings on financial and human resources as it relives the financial and administrative burden from the company.
For the private user with just their own vehicle contract hire is the simplest solution to car usage with fixed costs, and no more part exchange haggling with car dealerships!
How does it work?
The company or individual agrees to hire a vehicle of their choice for a pre-determined period at a fixed monthly cost (monthly rental). The finance company retains ownership of the vehicle for the duration of the contract and at the end of the contract the vehicle is simply returned. In fact in most cases vehicles are delivered to the customer and then collected at the end completely free of charge. The monthly rental is fixed and encompasses the capital cost of the car, its depreciation, the contract length, total mileage and RFL for the duration of the contract. If you do exceed your agreed annual mileage for the agreement then you will need to pay an excess mileage charge. This is calculated on a pence-per-mile basis and will be clearly shown on your finance agreement.
If a maintained contract is selected the routine servicing, maintenance and repairs SMR are also included within the rental. This can be further enhanced to include breakdown cover and even a relief vehicle can be provided when the contract hire vehicle is off the road, leaving just insurance and fuel as the customer’s responsibility offering the ultimate in fixed cost motoring.
Whilst being flexible - you can change your mileage for example, contract hire does not offer flexibility to change to a different model of vehicle part way through the contract or ending the contract early. Early Termination is best avoided if you can.
The Benefits
Low initial outlay
Typically the finance provider will require just 3 monthly rentals to be paid in advance. This is called the Advance Rental.
No negotiating is required
Due to the economies of scale of the leasing companies buying anything from 10,000 to 30,000 vehicles per year and spending millions of pounds per year on maintenance the best deals obtainable have already been negotiated for you. Doesn’t matter if you want just one or a hundred.
Taxable allowances
For business users, taxable allowances are very favourable making leasing the obviously tax effective solution. Want to read more about the new tax changes and their benefits click here.
The finance company purchases the vehicle and reclaims the VAT. This saving is then passed on to the hirer in the form of lower monthly rentals. Private individuals just pay the VAT on the monthly rentals. Business users (assuming business and personal usage) can claim 50% of the VAT from the Finance Rental and 100% of the Service Rental. Add the unclaimable VAT to the finance and Service rental and you end up with what is called the Effective Rental.
Removes disposal risks and associated costs
No haggling for part exchange prices or advertising and trying to sell your car privately.
Fixed costs
Giving greater budgetary control and ability for forecast costs.
Core lines of credit are kept open
Keeps core lines of credit open by not tying up vehicles as assets, this credit can then be utilised for running your business or buying essential equipment.
Flexible
Contract mileages can be altered part way though to cope with changing circumstances.
Your broker can seek the best deals available as they are independent and are normally not tied to one finance company.