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About Leasing

Business Contract Hire

What is contract hire?

Whenever you hear the term 'car leasing', chances are that it is referring to contract hire as it is the most common form of vehicle leasing agreement.

Basically contract hire means agreeing to take control of a car for a fixed period – it's yours to drive but it is 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. Firstly, 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 payments will be.

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's right for one driver might be wrong for another, and vice-versa.

For example by taking out a contract hire agreement you never take ownership of the car. That may be a problem for some, but an advantage for others who like the idea of being able to return the car and walk away without dealing 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 – you know exactly what you will 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 allowances can also be applied.

On the downside you must return the car at the end of the contract – there is no option to buy as there is with a 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'll 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 car on and want to drive a new vehicle every few years, then contract hire is ideal.

It's also perfect for businesses as it allows them to update fleets regularly with the latest vehicles, avoid large down-payments and adjust fleet size based on staff numbers.

New Tax Laws From April 2009:

Under the new tax regime, the cost of the car will not determine the taxation treatment; instead it will move to an emissions based system.

The corporation tax rules are again divided into three main parts:

Cars emitting 110 g/km CO2 or less will continue to receive a 100% first year allowance. This will remain in place until 2013.

Cars emitting more than 110 g/km CO2 and below 161g/km CO2 will receive a 20% writing down allowance on a reducing balance basis.

Cars emitting 161g/km CO2 or more will receive a 10% writing down allowance on a reducing balance basis.

The new regime will increase the amount of tax paid in the early years and therefore will increase the operating cost of cars emitting 161 g/km CO2 or more, whether leased or purchased outright. The maximum writing down allowance of £3,000 per annum has been removed.

Personal Contract Hire

Few purchases depreciate at the speed of a new car. As the theory goes, the car loses value as soon as you drive it off the dealer's forecourt. However, there are ways to eliminate the negative effects of depreciation – and personal contract hire is top of the list. Personal contract hire is both cost-effective and easy to manage. This guide to personal contract hire will explain how it works and who it's right for.

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 a car for a contractual period – usually referred to as the 'lease period'. Though the car is in your possession, it is not actually yours to own. Instead, you make fixed monthly payments to a leasing company for the duration of the contract – and when the contract expires you simply return the car to the leasing company or take out a new personal contract hire lease. As a result you never have to worry about resale values of the car – 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?

There are many advantages to personal contract hire including:

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 – With an optional maintenance package included 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 generally these are bases on perception:

Comprehensive car insurance – You will not be able to take out third party car insurance, you'll 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.

The length of the agreement is fixed, so it can cost around 50% of all outstanding rentals to terminate early.

The monthly rental is based on your declared mileage, so there will be a surcharge should you be over mileage and you will have paid more than necessary should you be under mileage. It's therefore important to be accurate when assessing your contract mileage.

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 car every few years, which is an excellent incentive. So as long as you don't mind not taking ownership of a vehicle, personal contract hire could be the right solution for you