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This section provides you with a brief overview of the types Of vehicle finance contracts available to you …
Contract Hire ...
What is Contract Hire?
Whenever you hear the term ‘Car Leasing’, chances are that it’s referring to contract hire, which is the most common form of vehicle leasing agreement.
Basically contract hire means agreeing to take control of a car for a fixed period of time – it’s yours to drive but it's 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. First, 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 it’s estimated worth at the end of the contract, taking into account depreciation, mileage etc. You then pay the difference between the two figures in monthly instalments. So the higher the residual value of the car, the lower your monthly payments.
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 is right for one driver might be wrong for another.
For example, by taking out a Contract Hire agreement you never take ownership of the vehicle; that may be a problem for some but an advantage to others who like the idea of being able to return the vehicle and therefore not having to deal with re-sales etc. Many Contract Hire agreements also include maintenance packages, meaning all you have to worry about is comprehensive car insurance and putting fuel in the tank.
Contract Hire offers fixed-cost motoring giving you comfort knowing exactly what you 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 allowance can also be applied.
On the downside you must return the car at the end of the contract; there is no option to buy the vehicle as there is with a Personal Contract Purchase 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 will 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 vehicle on; and want to drive a new car every few years, then Contract Hire is an ideal solution.
It’s also perfect for businesses, as it allows then to update their fleet regularly with the latest vehicles therefore keeping the fleet fresh; avoid large down-payments and adjust fleet size based on staff numbers.
If you think Contract Hire is the right form of car finance for you, check out our listings to find the right deal for you.
Personal Contract Hire …
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 the vehicle for a contractual period, usually referred to as the ‘lease period’. Though the vehicle is in your possession, it is not actually yours to own. Instead you make fixed monthly payments to the leasing company for the duration of the contract and simply return the vehicle at the end of the contract. Consequently you never have to worry about the resale values of vehicle because you can simply return it and walk away.
It’s 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 penalised 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 instalments. What are the pros and cons of personal contract hire?
What are the advantages of Personal Contract Hire?
Fixed prices – You can hire both new and used cars at fixed prices and not have to worry about interest charges. This can help you budget. Cost effective – The monthly instalments for a personal contract hire agreement will generally be lower than those of a personal loan. Road Fund Licence – This should be included in the agreement. Maintenance packages – Most personal contract hire deals will 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 about 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 these are generally based on perception:
Car insurance – You will not be able to take out third party car insurance, you will need a comprehensive deal as the car is not yours. You never own the vehicle. No option to buy - Unlike a Personal Contract Purchase agreement there is no chance 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 regular contract hire as this will include VAT built into monthly payments and additional incentives such as hire rental tax allowances.
However, for private 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 Hire gives you fixed monthly payments and you have the option to drive a new vehicle every few years, which is an excellent incentive. So, as long as you don’t mind not taking ownership of the vehicle, Personal Contract Hire could be the right solution for you.
If you think Personal Contract Hire is the right form of car finance for you, check out our listings to find the right deal for you.
Contract Purchase …
What is Contract Purchase?
Contract Purchase is ideal for companies who cannot fully reclaim VAT and is particularly suitable for financing the more expensive cars on the fleet, typically those costing more than £25,000.00.
The big difference between Contract Hire is that there is the opportunity to buy the vehicle at the end of the contract period. You have the option of paying a ‘balloon’ payment at the end of the contract making you the legal owner of the vehicle; alternatively you can simply hand the vehicle back to the funder.
If you think Contract Purchase is the right form of car finance for you, please contact us.
Personal Contract Purchase (PCP) …
What is Personal Contract Purchase?
Broadly, personal contract purchase is the same as a personal contract hire agreement – but with one key difference.
At the end of the contract, there is an optional balloon payment that the individual can choose to pay in order to take ownership of the vehicle. This amount is determined at the outset and allows the driver to keep the vehicle if they are happy with it. However, it is not essential – on the contrary, as with a personal contract hire deal, you could choose to return the car to the leasing company and walk away.
Monthly payments are based on the difference between the retail value of the car and the residual value – i.e. the estimated future value of the vehicle after depreciation is taken into account. Therefore, the more the vehicle holds its value, the better your personal contract purchase deal will be as that will reduce your monthly payments.
A mileage limit will apply to all personal contract purchase deals. This is because the leasing company will use the mileage limit to determine the vehicle’s depreciation and therefore its residual value. So it’s important to be honest with the leasing company about how much travelling you are likely to do – exceeding the mileage limit will lead to penalties.
Personal Contract Purchase is seen as a direct alternative to Hire Purchase and is subject to the protections set out in the Consumer Credit Act.
What are the pros and cons of Personal Contract Purchase?
There are many advantages to Personal Contract Purchase, including:
Fixed prices – You know exactly what you have to pay each month, which can help you budget. Initial down-payment – Only a small deposit is required. Option to defer payments – If you include a balloon payment at the end of the term, you can defer payments. Refinance – If you prefer, you can refinance the balloon payment at the end of the term. Maintenance packages – Most personal contract purchase agreements will include maintenance packages that can range from basic servicing to total vehicle management. No depreciation concerns – It’s not necessary to buy the car at the end of the term and so you can still choose to walk away without re-sale concerns. Access to more ‘upmarket’ vehicles – One of the key elements of a personal contract purchase deal is that it gives you access to previously unaffordable vehicles due to the low deposit and low monthly payments.
There are few disadvantages to a Personal Contract Purchase deal but it is usually more expensive than Hire Purchase agreements. It’s also worth remembering that you will have to arrange comprehensive car insurance, as the car will not be yours until the balloon payment is made.
Who is Personal Contract Purchase right for?
Generally, personal contract purchase is seen as the ‘best of both worlds’ in that you can choose to walk away from a deal, or exercise the option to buy.
Overall, personal contract purchase will generally be more expensive than traditional contract hire and hire purchase deals, but monthly payments are low. If you travel fixed distances and have a stable lifestyle, the mileage issue should not be a problem.
Consequently, personal contract purchase deals are well-suited to people who want to drive a car that would otherwise be unaffordable and who want to keep their options open with the right to buy.
If you think Personal Contract Purchase is the right form of car finance for you, please contact us.
Finance Lease …
What is a Finance Lease and how does it work?
A finance lease is a VAT-free method of financing a vehicle that is usually accessed by VAT-registered businesses and companies. It is offered to businesses where a moveable asset (the vehicle) is purchased from a supplier – your business can then use this asset while paying an effective rental rather than a repayment.
The monthly rental is determined by the initial cost of the vehicle, the period of the finance lease and the residual value – that is the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account. 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. Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the leasee. Alternatively you could choose to pay the entire cost of the vehicle (plus interest) in monthly instalments.
Some Finance Lease companies may offer you the chance to extend the finance lease with a secondary rental.
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.
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 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.
If you think Finance Lease is the right form of car finance for you, please contact us.
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