Vehicle Leasing
Vehicle leasing is a general term that is often used to describe various forms of contract hire and leasing. These can include Contract Hire, Personal Contract Hire, Contract Purchase, Personal Contract Purchase and Lease Purchase, all of which are explained below.
Contract Hire.
Contract Hire enables companies to run their company vehicles without the worry and risks of the capital cost and future vehicle values. Perhaps the simplest way to think of a Contract Hire agreement is as long-term car hire.
The contract is for a fixed term, which can be for a period of 12 months to 48 months. Typical terms for contract hire are either two or three years, normally with three monthly payments made in advance. For example if it were a two year contract of say £200 per month, you would make an initial payment of £600 and then pay 23 monthly payments of £200. All payments are subject to VAT, in most cases the company can re-claim 50% of the VAT in the case of cars and 100% for commercial vehicles. Normally the monthly rentals can be off set against profits. At the end of the term you simply hand the vehicle back (subject to the vehicle being of average condition for the year and mileage).
The advantages of Contract Hire to a company are as follows:
* Off balance sheet funding
* Fully budgeted costs
* Maintenance can be included
* No worries about future values
* Does not tie up staff time on vehicle disposal
Personal Contract Hire. (Contract Hire for individuals)
Personal Contract Hire is very similar to Contract Hire, detailed above; Contract Hire is designed for businesses and Personal Contract Hire is for individuals who wish to lease a vehicle. The only real difference for the client is the treatment of VAT. In the case of Contract Hire, the client pays a monthly rental to which VAT is added. In the case of Personal Contract Hire the monthly rental is inclusive of VAT.
The other benefits are the same as Contract Hire; fully budgeted monthly cost, maintenance can be included (so even the cost of replacing tyres is included in the monthly cost) and no further worries of disposing your vehicle when it comes to replacing your vehicle. For many car owners the worst aspect of acquiring a new car is having to advertise and sell their existing vehicle and discovering that in the time they have owned it, it has dropped dramatically in value. With Personal Contract Hire as with Contract Hire you simply hand the vehicle back at the end of the term (subject to the vehicle being of average condition for the year and mileage).
.What to look out for when obtaining a Contract Hire or Personal Contract Hire quote.
Vehicle sourcing and broking is at the moment unregulated. There are government plans that it should become a regulated industry, in the meantime care should be taken when obtaining quotations.
Advance Payments. A typical Contract Hire or Personal Contract Hire quotation will show three payments in advance, followed by perhaps 23 or 35 payments depending on the term. Some companies will advertise what appears to be a low monthly rental, however on closer inspection, it becomes evident that rather than three payments to be made in advance there are six. On other occasions the rental appears low because a much larger initial payment is required sometimes running into thousands of pounds (there is an example at the end of this section, as to how a cost comparison can be made between a company quoting six payments in advance and another quoting three in advance). In general the most straightforward way to make a cost comparison is to look at companies quoting three payments in advance and 10,000 miles per annum. I0,000 is the mileage companies normally advertise, should your annual mileage requirements be higher most companies will be happy to quote at your required level.
Deposits. If a broker requires a deposit it is very important to establish the terms under which the deposit is paid. There have been many cases of vehicles not being delivered and the customer being unable to recover their deposit.
Fees. On occasions there may be a fee payable, this can be unavoidable because some manufacturers charge a documentation fee, of perhaps £125 –£150. There are however cases of brokers charging their own fees. This is not necessarily a reason not to deal with a company but it is important to take the cost of the fee into account when comparing costs
Vehicle Availability. It is important to establish that a vehicle being advertised by a company is actually available at the price quoted and either in stock, or they are able to quote a delivery date. This can help avoid the time and sometimes money that can be lost ordering a vehicle that is just not available or not available at the price advertised.
Advance payments. Should you wish to establish which quote is the most competitive for a similar vehicle advertised, one company offering three and another six payments in advance, the calculation is as follows.
A Contract Hire Quote of £200 per month over 36 months with three payments in advance.
-------------------------------------------- £
3 payments in advance ------------ 600
35 monthly payments x £200 -- 7,000
Total cost -------------------------- 7,600
The same vehicle quoted at £189 per month over 36 months with six payments in advance.
-------------------------------------------- £
6 payments in advance ---------- 1,134
35 monthly payments x £189 -- 6,615
Total cost -------------------------- 7,749
In this example the vehicle that appears cheaper at first glance, is in practice more expensive. There is also a slight financial disadvantage when making six payments in advance; the extra cost of the three additional payments has to be found at the beginning of the contract, rather than being spread over the term. The difference however is minimal and in the interests of simplicity it is probably best to ignore this factor when making a comparison.
Vehicle Contract Purchase
Is very similar to Vehicle Hire Purchase, with the added flexibility of a Guaranteed Future Value (this is the value that the finance company estimate that the vehicle will be worth at the end of the term). The Guaranteed Future Value is usually set at a fairly conservative level and would have an agreed maximum mileage amount. The effect of having a Guaranteed Future Value is to reduce monthly payments. At the end of the term there are various options:
Pay the sum equal to the Guaranteed Future Value and become the owner of the vehicle.
Refinance the vehicle for the remaining sum
Part Exchange the vehicle and the dealer taking the vehicle in part exchange will settle the sum outstanding to the finance company and if there is a surplus amount over and above the Guaranteed Future Value, use this as a contribution to the new vehicle, or for any other purpose.
Simply hand the vehicle back to the finance company at the end of the term ( the finance will normally contact the customer three months prior to the end of the contract, to establish which route they wish to take) without any further commitment or liability (subject to the vehicle being of average condition for the year and mileage).
Personal Contract Purchase
Personal Contract purchase is designed for individuals rather than companies. Is very similar to Vehicle Hire Purchase, with the added flexibility of a Guaranteed Future Value. The Guaranteed Future Value is finance company’s estimate of the vehicle’s minimum future value and would have an agreed maximum mileage amount. The effect of having a Guaranteed Future Value is to reduce monthly payments. At the end of the term there are various options:
Pay the sum equal to the Guaranteed Future Value and become the owner of the vehicle.
Sell the vehicle and keep 100% of the sales proceeds over and above the vehicle’s Guaranteed Future Value.
Refinance the vehicle for the remaining sum
Part Exchange the vehicle and the dealer taking the vehicle in part exchange will settle the sum outstanding to the finance company and if there is a surplus amount over and above the Guaranteed Future Value, use this as a contribution to the new vehicle, or for any other purpose.
Simply hand the vehicle back to the finance company at the end of the term without any further commitment or liability (subject to the vehicle being of average condition for the year and mileage).
Vehicle Lease Purchase.
Lease Purchase is really the same as Vehicle Hire Purchase except that it allows you to have what is called a balloon payment at the end of the term. What this means is that at the end of the agreement there is a sum (the balloon payment) still outstanding.
This is normally set (taking into account future residual value tables) at a figure that the finance company believes to be a realistic estimate, of the value of the vehicle at the end of the term. It is of course better to underestimate rather than overestimate the future value.
It is important to note that at the end of the term the balloon payment must be paid, regardless of the value of the vehicle; even if the balloon payment appears conservative at commencement there is always the risk that the value of the vehicle may be lower than the balloon payment, that is due at the end of the term. For those who are concerned about this, an alternative would be to increase the monthly payments and reduce the final balloon payment.
If you have any queries or questions with regard to contract hire and leasing including Contract Hire, Personal Contract Hire, Contract Purchase, Personal Contract Purchase, Lease Purchase or any other form of vehicle finance, please do not hesitate to contact us. Bowater Price plc 01494 536 536.