People often ask me – what do you do? Contract hire or buy your cars?
That’s just not a simple question. Because that all depends on the car and of course, the deal.
Contract Hire has become, over the years, an increasingly popular way of acquiring cars. Nowadays, it is popular with individuals as well as companies – mainly because of the lower monthly repayment implications when comparing to financing a car via Hire Purchase.
A lot of people just can’t get their head around why they would want to pay monthly for the use of their car and not own it at the end of the contract. A popular train of thought is that taking on a contract hire vehicle is like renting a house. It’s dead money.
But that is not entirely true.
And that is because (sadly) cars don’t usually go up in value; they depreciate. Bricks and mortar is an entirely different kettle of fish.
What you are effectively doing when you take on a contract hire vehicle is funding the depreciation. You are funding what you are going to lose, anyway. In doing so, you are fully aware of what your loss will be over the term and you are not funding the capital cost of the car directly.
Let’s not forget that if you own a car, you will still have to sell it at the end. You still have to pay for any damage that may have occurred to the vehicle while you have been running it; whether it means selling it at a lower price to the buyer to compensate for it, or whether it means that you need to fix the damage before you put it up for sale.
Also, if you drive to the moon and back your car will be worth less when you sell it than if you have done 8000 miles per year. Mileage will cost you – one way or the other – if you do more than “the norm”. The more miles you drive, the more your vehicle will devalue – and that is how your monthly cost is worked out.
As I have mentioned, contract hire prices are all calculated around depreciation. It is a fact that some cars lose more than others and this is reflected in the monthly “rental”. This is one of the reasons why you will often see prestige marque cars at a lower rental than other more mainstream cars.
Also, manufacturers and finance companies will often support a contract hire deal behind the scenes to make the figures stack up. Sometimes, this support results in a payment that is lower than depreciation would cost you alone (and don’t forget interest on any finance) if you owned the car outright. In these cases, leasing is a no-brainer.
So, like I said earlier, when you are comparing vehicle acquisition methods it is a simple matter of working out what method saves you the most. You also have to decide whether you want to take your vehicle on personally or as a company car (if you have that choice) and that is a whole different topic (but thankfully, one that we cover in our Company Car or Car Allowance? category).
Contract Hire: Key Points
- Contract Hire is a fixed term contract and payments are also fixed for the period
- Deposits are typically low – expect to pay 3 payments in advance (usually plus a small administration fee), or maybe 6 payments in advance
- There are no disposal worries at the end of the contract term – you just hand the car back
- You can choose to include all routine maintenance (tyres, exhausts and batteries) in your contract, meaning that all you have to worry about is fuel and insurance
- Very often, road tax is also included for the term
- Because the leasing company claim back the VAT when they purchase the vehicle, this saving is passed back to you in the form of lower monthly payments
- You can claim back 50% of the VAT on the rental of your contract hire car (100% for commercials) and 100% back on the maintenance element
- Contract Hire is an off balance sheet form of funding and rentals are allowable against tax
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