Contract hire is a simple way to drive a brand-new car on a “usership” style arrangement; the product is NOT designed for the business to own the vehicle at the end of the contract. Whilst a minority of finance companies will allow the vehicle to be purchased, this is very rare and the price you pay to own the vehicle will be calculated on the market valuation at that time. It does not take into account any rentals you may have paid. With strong residual values on electric vehicles, this is something to consider.
The price you pay per month to lease a vehicle is based on a number of key factors including:
- The vehicle you require (including any additional specification) – leasing is limited to new, or nearly-new, vehicles only;
- The contract length – the customer can select two, three or four years (five years is available with some finance companies);
- The annual mileage – this can be anywhere between 5,000 and 50,000 per annum, depending on the driver’s requirements. With electric vehicles, you do need to consider the vehicle’s battery range and capabilities. Some finance companies set maximum mileages for certain low-range electric vehicles;
- The initial rental – this is the amount you pay in month one and is sometimes incorrectly referred to as the initial payment or deposit. As leasing is a usership-style product it is referred to as a “rental”. You can generally adjust this initial amount to as much or as little as required. The total amount payable remains the same with contract hire; this is about choosing an amount which meets the company’s requirements.
Key Considerations:
- Contract hire is a credit-based agreement – the business (and any proprietors, partners or directors) must go through a formal underwriting process. If you have poor/adverse credit or if you have a newly incorporated company, this product may not be suitable;
- Contract hire is a fixed term agreement – you cannot hand the vehicle back at any time. In order to return the vehicle, you must enter into a process known as Early Termination, which has cost consequences; and
- Excess mileage – you cannot exceed the maximum mileage allowance without a cost consequence.
Advantages of Business Contract Hire
- Fixed period of car usership ranging from 24 to 48 months – the company can build a contract around its requirements. For some companies who are unsure about operating an electric vehicle or for driver’s looking to build a contract around company car tax changes, leasing offers this contract flexibility;
- Low initial rental options are available (subject to finance company/lender’s acceptance) – leasing does not require any “big deposits” and for those organisations looking to preserve cash-flow, this is ideal;
- Option to include a maintenance package – any business can add this to the contract in order to cover the cost of all routine servicing, maintenance and tyres. Each finance company will have different terms and conditions but, in many cases, this provides for outsourced fleet administration;
- VAT – If the business is VAT registered, it can claim up to 50% of the VAT on the finance rentals and 100% of the VAT on any maintenance elements;
- Tax efficient product – monthly rentals can be offset against taxable profit; and
- No depreciation concerns – for those businesses who do not want the risk of vehicle ownership, leasing provides far more certainty. If the vehicle depreciates quicker than anticipated, this is a risk the finance company will absorb.
Disadvantages of Business Contract Hire
- The company will be charged for any damage that is not acceptable under the British Vehicle Rental and Leasing Association’s (BVRLA’s) Fair Wear and Tear Guidelines. This is available from Car-E-Lease UK upon request;
- Leasing is not flexible – unlike some purchase products which allow you to return them at any time, contact hire is a fixed term agreement;
- You will be charged an excess mileage rate for any mileage above your contracted rate (set at a pre-agreed pence per mile); and
- There is generally no option to purchase the car at the end of the contract – this is not suitable for those businesses who wish to own a vehicle.
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