The term “contract hire” refers to the most common form of leasing agreement and means that you agree to take control of the vehicle for a set period of time. However, despite being yours to drive and maintain, you never actually own it.
The “no strings” attitude attached to contract hire vehicles make it a popular choice for many businesses. However, it’s particularly favoured by those who are VAT-registered because of the great savings that can be made.
The “contract” refers to the agreement you make with the leasing company to make fixed monthly payments for an agreed period before returning the car at the end of the contract.
The price of this type of agreement depends on a number of things:
1. The price of the car (the amount you’d pay if you were to buy the car outright)
2. The residual value of the car (the value of the car at the end of your contract after taking into account mileage, condition and depreciation)
Your payment is calculated between the difference of these two prices, so essentially, the higher the residual value of your vehicle, the lower your monthly payment will be.
Advantages of contract hire
– You’ll never get bored as you can choose a brand new car every two, three or four years, depending on the contract you choose
– You can simply hand the car back at the end of your contract, the responsibility of resale doesn’t fall on the business
– You can add maintenance into your monthly cost, this includes tyres, servicing and MOTs where necessary, so all you have to worry about is insurance and fuel
– Road tax costs are covered by the leasing company for the duration of your contract
– Because the company will be paying a set price every month, it’s really easy to keep accurate records for the accountant
– VAT registered companies can claim back 100% of their maintenance costs and 20% of their total payments for the duration of their contract
– Your business will also benefit from the fact it’s not losing money in a fleet of depreciating vehicles
Disadvantages of contract hire
– You will never own the vehicle
– If you end up loving the car you’ve chosen, there’s no option to buy it at the end
Who should choose contract hire?
It’s really important to think about your driving habits when working out which is the right lease for you. Although contract hire is open to any business, if your mileage is high then your monthly payments will be higher as the vehicle’s depreciation will be increased, so this is something you need to bear in mind.
Contract hire is also perfect for any business looking to avoid large down payments on vehicles, update their fleet vehicles regularly and have the flexibility to increase or decrease the fleet size depending on staffing levels.