If you’re considering buying a new car for yourself or your company you are spoilt for choice by the various finance options available. However, one of the most consistently popular choices is contract hire – because it often proves the most cost-effective and the easiest to manage.
So how do contract hire agreements work? This guide to contract hire will explain.
Whenever you hear the term ‘car lease’, 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.
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.
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.