Contract hire is also known as ‘leasing’.
It’s a method of financing vehicles that involves taking a fixed term contract with a chosen mileage limit and having a fixed monthly payment calculated accordingly.
Typically contracts range from 2-5 years in duration and once the contract is over you simply return the car back to the finance company without having to pay any kind of settlement figures.
Under a contract hire agreement you will not own the car.
It’s effectively a long-term rental contract in which you pay the depreciation of the car without having to worry about what the car is worth afterwards (‘residual value’.
The finance company takes on the risk of the residual value of the vehicle so regardless of crashes in the used car market, you don’t have to worry about being out of pocket.
Benefits Contract Hire
- Hassle Free – Whenever you take a new vehicle on a contract hire agreement you will benefit from road tax being included for the whole contract. Also with it being a new vehicle it will be covered by the manufacturer’s warranty and it will be delivered and collected from you! You can also opt for maintenance packages for a completely hassle free experience.
- Flexible payments – You can pay a higher amount in the first month in order to reduce monthly payments and help with cash flow. Equally you can choose to spread everything equally across the contracted period.
- Free Up capital – Due to contract hire not requiring a large initial outlay, it can free up capital for the business. This is particularly helpful for companies that own their fleets and want to free up the cash locked in their vehicle assets.
- Eco-Friendly – Having access to the latest models that manufacturers offer means that there are equipped with the latest green technologies and can help lower a business’ carbon footprint.
- Latest Technology – Having the latest technology in vehicles will help ensure that your drivers are comfortable, safe, and that vehicles are fit for purpose (Duty of Care risks).
- Lower Maintenance Costs – Typically having a new vehicle will mean that you have less unscheduled maintenance issues pop up.
Things to remember:
- Excess Mileage – Try to estimate a reasonably accurate mileage for your contract. If you exceed this mileage you will have to pay what’s known as an ‘excess mileage charge’ to cover the additional depreciation.
- Won’t Own The Vehicle – Although this can vary between finance companies, typically there is no option to buy the vehicle at the end of the contract.
- Maintenance & Damage – BVRLA members use a specific wear and tear policy as part of their membership. This describes what is allowed and what would be charged for. You also need to make sure that maintenance and servicing is kept up to date.
- Fixed Contract Duration – You are contracted into a fixed period. Some finance companies allow early terminations which will cost a minimum of 50% of the remaining rentals. Equally you need to make sure that you have arrangements in place before the end of the contract.