Why do some companies opt for the outright purchase of a new vehicle in preference to Contract Hire, or even Hire purchase? It's an interesting question and the answer is that probably not many companies do nowadays. However some companies are still choosing this route when acquiring a vehicle, what are the reasons?

It can just be a personal rather than financial decision; some people do not like debt or commitment in any form and whichever way you look at it Contract Hire is a commitment, as you agree to take and pay for a vehicle over a fixed term.

Some companies albeit a minority, do have sufficient cash reserves that enable them to have no borrowing and purchase their vehicles and other capital items outright. Although does it make sense to tie up such large sums of money in a depreciating asset such as a vehicle? Particularly when one really can never be certain just how much a vehicle is going to depreciate and this of course is the risk that Contract Hire companies take on.

When predicting future residual values, Contract hire companies take into account amongst other things the popularity, reliability and future running costs of a vehicle. They will also take into account any model changes that are due or may become due during the term, and eventually arrive at the future residual value. How accurate will these figures be? As Secretary Rumsfeld once famously said, "There are known knowns, known unknowns, and unknown unknowns", which roughly translates into "we just don't know". As much as any company can try to accurately predict future values, there are many factors that could potentially change residual values.

Of course a Contract Hire company cannot afford to be too pessimistic with regard to future values, because this would make their rates uncompetitive compared to other companies. There have been occasions in the past when residual values have been hit very hard indeed. The Contract Hire company suffers these losses, the client carries on paying his fixed monthly payment and at the end of the term just hands the vehicle back, regardless of its value.

It does seem surprising in view of the fact that there is always some uncertainty over residual values that a company will for example pay cash for a vehicle costing over £38,000, when the same vehicle is available over two years on Contract Hire for *£460 per month + Vat.

It is also surprising that some companies will pay perhaps £25,000 for a second hand vehicle that is outside of its warranty period, in preference to Contract Hire, with the possibility of an engine seizure a week later, or perhaps worse, for the car to develop an electronic problem. Electronic problems can be notoriously difficult to find and cure. As vehicles become more technologically advanced, electronic problems are increasingly becoming the cause of vehicle breakdowns. Re-occurring electronic problems can be a nuisance when a vehicle is under warranty, they can be a financial disaster if a vehicle is outside of its warranty period; in terms of the dealership's hourly rates (usually it is the main dealership that will have the diagnostic equipment to find the cause of an electronic problem), lost staff time and disruption.

It is ultimately an individual decision, as to whether one should opt for Contract Hire as opposed to purchasing a vehicle outright. Some of the factors that may be worth considering before making a decision are as follows:

1) Current interest rates; what one could earn on the money invested over the same term as might be considered for Contract Hire.
2) What other uses the capital could be put to within the company.
3) The potential depreciation of the vehicle to be purchased.
4) The possibility that the capital may be required for some unforeseen eventuality or emergency situation.

Certainly looking at the two main factors, interest rates and depreciation, can assist in comparing the two methods over any given term. Depreciation can vary significantly from vehicle to vehicle. That is why rates for Audi, Volkswagen and BMW Contract Hire, will often appear low compared with the cost of the new vehicle and other manufacturers, this is because they hold their value so well. If ultimately the decision is to outright purchase, those are three manufactures that are worth considering as they have historically done very well on residual values. It is however worth checking on the various models as some models fair much better than others.

*Three payments in advance, followed by 23 monthly payments of £460. Companies can normally reclaim 50% of the Vat payable.

Should you have any queries or questions with regard to Contract Hire, Personal Contract Hire, or vehicle Hire Purchase, please do not hesitate to contact us. Bowater Price plc 01494 536 536. www.bowaterprice.com

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