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Type of Finances

Contract Hire

It is also perfect for businesses as it allows them to update fleets regularly with the latest vehicles, avoid large down-payments and adjust fleet size based on staff numbers. 
So how do contract hire agreements work? This guide to contract hire will explain.

What is Contract Hire? 

Whenever you hear the term ‘car leasing’, chances are that it is referring to contract hire as it is the most common form of vehicle leasing agreement. Whenever you hear the term ‘car leasing’, chances are that it is referring to contract hire as it is the most common form of vehicle leasing agreement.  

Basically, contract hire means agreeing to take control of a car for a fixed period – it’s yours to drive but it is never actually yours to own. Instead you reach an agreement with the leasing company to make fixed payments (usually monthly) for the duration of the contractual period. At the end of the contract you return the car to the contract hire company. 

Your contract hire payments will be determined by a number of factors. Firstly, there is the retail price of the car – that is the price you would have to pay if you were to buy it outright. Then, there is the residual value of the car – that is its estimated worth at the end of the contract taking into account depreciation, mileage, and condition. You then pay the difference between the two figures in monthly instalments. So, the higher the residual value of the car, the lower your payments will be. 

​What are the Pros and Cons of Contract Hire? 

Many of the advantages and disadvantages of contract hire are a matter of perception – i.e. what’s right for one driver might be wrong for another, and vice-versa. 

For example, by taking out a contract hire agreement you never take ownership of the car. That may be a problem for some, but an advantage for others who like the idea of being able to return the car and walk away without dealing with selling or trading the car for another one. Some contract hire agreements also include maintenance packages – meaning all you have to worry about is comprehensive car insurance, tyres, and putting fuel in the tank.  

Contract hire offers the advantage of fixing many of your motoring costs – you know exactly what you will have to pay and when you have to pay it, helping you to budget. This also makes contract hire popular among VAT-registered companies who can reclaim 50% of the total payments made and 100% of the maintenance package costs. Hire rental tax allowances can also be applied. On the downside, you must return the car at the end of the contract – there is no option to buy as there is with a personal contract purchase (PCP) agreement. 

WHO IS CONTRACT HIRE RIGHT FOR?

Think about your motoring habits before deciding if contract hire is right for you. If you travel a lot, then your mileage will be high which will increase the car’s depreciation and therefore your monthly payments. If you have a flexible job and have to travel varied distances, it can also be difficult to estimate your mileage – and if you exceed your mileage limit, you’ll face additional charges.  

However, if you want to be able to budget with fixed monthly costs, like the idea of not having to sell the car on and want to drive a new vehicle every few years, then contract hire is ideal.  

It is also perfect for businesses as it allows them to update fleets regularly with the latest vehicles, avoid large down-payments and adjust fleet size based on staff numbers. 

Business Car Leasing

It’s no coincidence that leasing a car for business purposes has become increasingly common in the UK as more and more financially savvy motorist wakeup to the advantages.

While some are turned off immediately at the prospect paying for something they will never actually own, they also overlook how cars can quickly depreciate and rapidly plummet in value.

The fact that a new car sees thousands of pounds hacked from its value the moment it rolls off the forecourt should be enough to instill a life of leasing into any motorist, but drivers who lease cars direct enjoy more benefits than merely offloading the worry of selling their vehicle a few years down the line.

Apart from not being lumbered with any crippling up-front costs or capital outlay, one of major plus-points of business car leasing is that you are able to pull-off in a vehicle that would typically sit outside of your price range if you were to buy it outright.

Monthly repayments are still part of the package but when compared to repayments on a car loan, these can be up to 55% cheaper. Also, in the majority of lease agreements, only a small deposit is necessary, usually amounting to three monthly payments.  

The car manufacturer warranty will normally cover the period of the lease and maintenance costs can also be covered. Road tax is also usually included in the lease agreement.  

There are further financial incentives in that by driving a brand-new car, every two to four years, you'll enjoy better fuel economy and performance advancements found on newer models, not to mention greater safety. All in all, it makes attractive business sense.  

How do you actually go about Business Car Leasing?

If you are familiar with the idea of any form of leasing, then it's a very similar process. The key for any business car driver is to thoroughly research the market and decide upon a shortlist of makes and models of interest. Once satisfied with this shortlist, use a website such as leasingbrokernews.co.uk to check the latest leasing deals and once a satisfactory deal has been found contact the advertiser.

Signing a leasing contract obliges you to make regular payments over a period of time, let’s say 24 months. Business Car Leasing deals are typically either 12, 24, 36, or 48 month long.

At the end of the term you simply return the vehicle to the car leasing company and that's it. In some cases, you may be given the option to buy the car or you could swap it for a newer model. Alternatively, there's nothing stopping you from simply walking away.

Personal Contract Hire

Few purchases depreciate at the speed of a new car. As the theory goes, the car loses value as soon as you drive it off the dealer’s forecourt. However, there are ways to eliminate the negative effects of depreciation– and personal contract hire is top of the list. Personal contract hire is both cost-effective and easy to manage. This guide to personal contract hire will explain how it works and who it’s right for.  

What is Personal Contract Hire?

Personal contract hire is essentially the same as regular contract hire, but it applies exclusively to private individuals. It is the most common form of car leasing and usually when the term ‘car leasing’ is referred to, most people are talking about personal contract hire.  

With a personal contract hire agreement you take control of a car for a contractual period– usually referred to as the 'lease period'. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments to a leasing company for the duration of the contact– and when the contract expires, you simply return the car to the leasing company or take out a new personal contract hire lease. As a result, you never have to worry about resale values of the car because you never own it, so you can simply return it and walk away.  

It is important to understand how your payments are determined.  

The personal contract hire company will work out the 'residual value' of the vehicle– that is its value at the end of the contractual period once depreciation is taken into account. To estimate this value, the company will ask you to stick to a strict mileage limit while you drive the car, exceeding this limit could see you penalized at the end of the term. 

To determine your payments, the company will deduct the estimated future value (residual value) from the retail price of the car– and you pay the difference in monthly installments. 

What are the pros and cons of Personal Contract Hire?

There are many advantages to personal contract hire including: 

 *Fixed prices– You can lease both new and used cars at a fixed monthly price and not have to worry about interest charges. This can help you budget. 

 *Low initial payment– Typically, three monthly payments.  

 *Cost effective– The monthly installments for a personal contract hire agreement will generally be lower than those of a personal loan. 

 *Vehicle Exercise Duty (road tax) – This will be included for the duration of the agreement.

 *Optional maintenance packages– Personal contract hire deals can include maintenance packages, so you don’t have to worry about the general upkeep of the vehicle.  

 *No depreciation concerns– You don’t have to sell the car at the end of the term, so you don’t have to worry its depreciation.  

 *Access to more ‘upmarket vehicles’– With a personal contract hire deal, you could afford a car that would otherwise be too expensive. As luxury cars tend to depreciate at the slowest rates, these often provide the best personal contract hire deals.  

There are disadvantages to personal contract hire too, but generally these are based on perception:  

 *Comprehensive car insurance– You will not be able to take out third party car insurance, you'll need a comprehensive deal as the car is not yours.  

 *You never own the vehicle. 

 *Fair wear and tear policy will apply, along with a mileage limit.

 *No option to buy– Unlike a personal contract purchase agreement, there is no opportunity to buy the vehicle at the end of the contract.  

Who is Personal Contract Hire right for?

If you run a business, you should investigate business contract hire as this will include VAT built into monthly payments and additional incentives such as hire rental tax allowances.

However, for individuals, personal contract hire can be ideal dependent on your circumstances - just think about how you plan to use the vehicle. If you travel a lot and your mileage is high, the residual value of the car will drop which will increase your monthly payments. However, personal contract hires give you fixed monthly payments and you have the option to drive a new car every few years, which is an excellent incentive. So, as long as you don't mind not taking ownership of a vehicle, personal contract hire could be the right solution for you.

COMPANY VEHICLE LEASING 

The advantages of car leasing may now be recognized by general consumers, but it was company vehicle leasing that began the explosion of interest in leasing deals.

There are many incentives for company vehicle leasing. By buying a fleet of vehicles outright, you are forced to make a large cash payout and take on ownerships of cars that may not hold their value over a prolonged period of time. With company vehicle leasing, you can spread the payments into more manageable monthly sums, knowing that you can return the car at the end of the contractual period and upgrade with a new company vehicle lease if necessary. 

This is particularly useful for business that have a high turnover of staff or flexible workloads. By taking out a short-term company vehicle leasing agreement you guarantee that you have the vehicles when you need them– and you are not left with unwanted cars once this period ends. 

One of the most important elements of company vehicle leasing is the mileage limit for each car you lease. Bear in mind that residual values will be calculated based on the mileage limit you agree with the leasing company at the start of the contractual period. It is important to accurately estimate this mileage. If you drive over the limit, you could be fine– but if you drive significantly under the limit, you could be paying too much on your monthly payments.

The key to company vehicle leasing is flexibility. If you’re starting a new business, you avoid making a large downpayment, you know your monthly payments will be lower than with purchasing options and due to lower expenses, you can potentially afford cars that were previously out of reach. You could offer a stronger image of your business by leasing a company vehicle that would not be affordable if you were to buy outright.  

Finance Lease

Flexibility is one of the keys to success for any business, large or small. If your business requires one or more vehicles but does not have the finance to pay for the asset, then a car finance lease could be the solution. It's an alternative to hire purchase, with more freedom but just how does a finance lease work and is it right for your business?

What is a Finance Lease and How does it work?

A finance lease is a method of financing a vehicle that is usually accessed by VAT-registered businesses and companies, however sole traders and partnerships can also take advantage of finance lease. It is a form of car finance where the vehicle remains the property of the finance company, with the vehicle effectively hired out to a business. The business can then use this asset while paying an effective rental rather than a repayment. Finance lease differs from contract hire in that you usually ‘balloon payment' at the end of your lease agreement which pays of the leasing company's investment. You agree how much your balloon payment will be, depending on whether you want higher or lower monthly payments during the lease agreement. In this sense it is more flexible than a contract hire agreement. 

The exact monthly rental is determined by the initial cost of the vehicle, the period of the finance lease, the residual value, and that end balloon payment (not necessarily the vehicle’s residual value). As a residual value is used to calculate your monthly rental, most finance lease companies will insist that you stick to a strict mileage limit as this mileage restriction is used to determine the future value. 

You have full use of the vehicle during the finance lease period. At the end of the finance lease agreement the vehicle is sold to a third party by the finance company, if the sold price is above the pre-determined balloon payment, then the finance company will refund a percentage of the proceeds back to the hirer, if the sale price is below the balloon payment then the hirer will be liable to make a further payment to the finance company. This way, a company with a finance lease agreement shares more of the risk of the vehicle but can also potentially profit if the car exceeds its RV, than of they took a contract hire deal. Alternatively, you can agree to lease the vehicle again for a further period if you don't wish to see it sold.

What are the pros and cons of a Finance Lease?

There are numerous benefits to acquiring a finance lease. These include:

 *Low monthly costs and initial outlay– One of the main reasons why companies take on finance leases is to avoid the initial hefty outlay

 *Flexibility– Most finance lease companies will offer a number of payment options to suit your cash flow. You can make deferred payments, lowering the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly installments.

 *Latest vehicles– You can gain access to the latest vehicles that would otherwise be unaffordable.

 *VAT payments– Up to 50% of the VAT payments can be reclaimed.

 *Balance sheet– Taking out a finance lease allows you to feature the vehicle on your balance sheet, and outstanding rentals are represented as a liability.

 *Hire rental tax allowances can be applied for.

 *Sales proceeds– You can boost your equity by receiving a proportion of the sale at the end of the finance lease term.  

There are disadvantages to finance leases too. Primarily these are that you will never take ownership of the vehicle as the car or van must be sold to a third party. A further disadvantage is that the hirer also takes on the administration and operating risk associated with the vehicle, including the road fund license.

Furthermore, interest rates can vary steeply from company to company and unless you're savvy you could pay out much more than you need to. Be prepared to shop around for the best deals. Also watch out for unexpected fees including documentation fees, which are paid at the outset and additional charges from the finance lease company.

Who is a Finance Lease right for?

A finance lease removes the pressures of heavy initial outlays. It is a proven method of giving your business access to the latest vehicles without actually having to take ownership and buy them outright. There are also tax benefits too, which make this an ideal car finance method for many businesses.  

However, do be aware of the interest rates and be willing to shop around.

Hire Purchase

One of the most common forms of financing a vehicle is through a process known as ‘hire purchase', which allows you to take ownership of a car once all payments are made. However, how does hire purchase (HP) work and how does it compare to other methods of car finance? This guide to hire purchase will explain.

What is Hire Purchase and how does it work?

Hire purchase combines elements of both a loan and a lease. You reach an agreement with the dealer to pay an initial deposit, typically anything between 10% and 50%, and then payoff the balance in monthly installments over an agreed period of time. At the end of this period, the car is yours. 

 Unlike a lease or a personal contract purchase agreement, the residual value of the vehicle is not taken into account. Instead, your monthly payments on a hire purchase agreement are determined by the retail price of the vehicle, the size of the deposit and the length of the contract.

In effect, the contract is between you and the lender (usually a bank or broker) but is normally arranged by the dealer. The lender effectively buys the vehicle and allows you to use it while you make payments. Only when all payments are complete is the car officially yours. 

What are the pros and cons of Hire Purchase?

The main advantage of a hire purchase agreement is that you can buy something you couldn't otherwise afford.  

Your monthly payments are effectively secured against your car– and this has both pros and cons. Positively, this means you're more likely to secure finance than you would be by shopping around for an unsecured loan as the lender has some 'security' in the form of your car– this is often reflected in better interest rates. 

On the downside however, you must be sure you can keep up with payments or the lender will have the right to repossess the vehicle. 

Normally this will apply if you’ve paid less than a third of the agreement if you’ve paid more than that it is usually necessary for the bank to take you to court to either reclaim the vehicle or the remaining cash. For most, however, this is a safer form of finance than a regular secured loan which puts your house at jeopardy if you can't meet repayments. Interest rates can he high– they are usually determined by your credit rating. It's also worth remembering that it's not necessarily in the dealer's interest to get you the best deal– they will encourage you to take hire purchase agreement so they can commission from the lender. Their objective is often to sell you money at the highest possible rate– so ask questions and be prepared t0 look around to other lenders for a better rate or interest. 

It's important to check out the APR to determine what the real cost of borrowing will be. Monthly payments will usually be higher than other forms of car finance, but in the long run the overall sum will be lower.

If you have a lot of money to put down on the vehicle you could secure a 0% finance deal. This will be a huge money saver– it could even save you as much as £1,000 for every £1,000 borrowed.

Reselling the vehicle during the hire purchase term can be complicated.

You will still need to pay off the money you owe in full. Also, watch out for early settlement fees and 'option to purchase' fees. These are not mandatory on hire purchase agreements but will be charged by some dealers.

Who is Hire Purchase right for?

Hire purchase is the traditional form of car finance and is a good way of paying for a car– a sizeable deposit followed by 12 to 48 monthly payments to pay of the rest of the retail price plus any interest.

Lease Purchase

Lease Purchase, or LP, is one of the most affordable ways to pay for a vehicle, as it is available for used vehicles and comes with low monthly payments. These instalments only cover part of a vehicle's cost, and the rest is deferred to a final, mandatory payment that must be made at the end of the agreement. At this point, you will own the vehicle.

What is Lease Purchase and how does it work? 

A lease purchase agreement spreads the cost of buying a vehicle into three sets of payments:

The first is a deposit that you pay before you get the car or van. This is often around 10% but can be up to 50%. The more you pay now, the lower your monthly payments will be. 

The second set of payments are your monthly instalments, which typically run for between two and four years. These are lower than some types of car finance, such as a bank loan or Hire Purchase (HP), because they only cover part of the cost of the car. Monthly payments may be a little lower than Personal Contract Purchase (PCP) finance because lenders charge slightly less interest.

At the end of the agreement, you have the third type of payment to make: the final instalment, which is often called the balloon payment. This is usually several thousands of pounds and must be paid - you cannot just hand the car back. However, there is usually the option of extending the lease agreement by making additional monthly payments or refinancing the vehicle to cover the balloon payment if you are unable or unwilling to pay the lump sum.

Lease Purchase (LP) helps you to buy a vehicle with lower monthly payments than a traditional hire purchase agreement as a large proportion of the amount you repay is deferred into the Final Repayment.  

However, you will pay more interest on an LP agreement than an HP agreement for the same loan amount, term, and APR* as your balance reduces more slowly due to the larger final repayment.  

When the agreement ends, you can own the vehicle by paying the final repayment or part exchange, the vehicle. This product differs to PCP as there is no vehicle return option at the end of the agreement.

It is generally a cheaper option than Hire Purchase (HP) and can be more flexible than Personal Contract Purchase (PCP), as the monthly instalments and final payment can be widely adjusted. 

Who is Lease Purchase right for?

Lease purchase is great if you are seeking to own the vehicle in the long-term whilst looking to minimize your monthly cost in the short-term. With a lease purchase you benefit from lower monthly payments than Hire Purchase (HP), thanks to the option of deferring an agreed amount (known as a Balloon Payment) to the end of your contract. Once your balloon payment has been settled, the car is all yours.

Lease / Contract Hire (CH)

Car leasing/contract hire Car leasing, akin to a long-term rental agreement, offers the exclusive use of a car for a predetermined period at a fixed monthly price. For businesses, leasing is a cost-efficient method of funding vehicles, leveraging tax and VAT regulations to decrease the overall running cost. This is also supported by the purchasing power of finance companies to minimise expenses further.

Depreciation is a significant new car expense, with many new vehicles losing more than half of their initial value after the first three years. However, leasing mitigates this issue. Unlike dealer finance or bank loans, where you pay for the vehicle's entire capital value, leasing requires payments for the vehicle's depreciation over the lease term. Initial payments are typically smaller, equivalent to three monthly payments.  

At the end of the lease (usually two or three years), you return the car, with the lease company responsible for selling the vehicle and covering depreciation costs. This is known as contract hire or leasing, a form of finance that funds vehicle usage, not ownership. Credit applications are required, as it's a form of finance.  

The monthly lease payment depends on three factors:

Annual mileage: More miles driven equals higher monthly payments.  

Contract length: Generally, longer contracts yield lower monthly payments.

Initial payment size: A larger initial payment reduces the monthly payment amount.  

However, leasing does carry certain risks. Lessees are accountable for the vehicle's condition, with any damage leading to repair charges. It's also crucial to accurately estimate your annual mileage. Exceeding the specified mileage limit results in an excess mileage charge.  

A typical lease offer might look like this:  

 "3+35 10k £235 (inc VAT)" represents a three-year contract with an initial payment of three times the usual monthly rental.

Here, the first-month payment would be £705, followed by 35 regular monthly payments of £235. The contract is based on a maximum of 10,000 miles per year, or 30,000 miles over the contract's three-year duration. Any unused mileage from one year can roll over into the next.  

Flexible Lease 

A flexible car lease, also known as a short-term lease, is a lease agreement that provides more flexibility than a traditional lease. It is designed to meet varying individual or business needs for vehicle usage over a shorter period. These leases can often range from one month to two years, depending on the leasing company's offerings and the customer's requirements.

Unlike traditional leases that usually last for two to four years, flexible leases allow customers to have a vehicle for a shorter period, and they often come with the ability to extend the lease on a month-to-month basis after the initial term has ended. They provide an opportunity to change vehicles more frequently and are often used by businesses that need to add or subtract vehicles from their fleet based on fluctuating business conditions.  

Flexible leases are also a convenient option for individuals in a transitional phase, like relocating for a short-term job assignment, trying out a new type of vehicle, or needing a car while their own vehicle is out of service.  

Some benefits of flexible car leases include:

Flexibility: They provide the option to change vehicles more frequently or cancel the lease with less notice than a standard lease.

Lower Commitment: They are perfect for individuals or businesses that need a vehicle for a short period or are unsure of their long-term vehicle needs.

No Long-term Contracts: Flexible leases don't require a multi-year commitment, which makes them ideal for individuals or businesses with changing vehicle needs.  

Cost-effective: Often, they include maintenance, road tax, and sometimes even insurance within the monthly lease payments, which could lead to cost savings. 

However, remember that monthly payments for flexible leases can be higher than those for traditional leases because the leasing company needs to account for the uncertainty of when the vehicle will be returned and the additional administration involved. But despite this, they can often be a more cost-effective option than daily rental rates for those needing a vehicle for several months.