CAR FINANCE

What is Contract Hire and car leasing?

Contract Hire and car leasing is offered in many forms however in essence the process is essentially the same: that is, you lease (think of it as a long term rental!) a car (in either your personal or business capacity) for a fixed period and agree to do a fixed mileage over that period. In return the finance company charges you a fixed monthly cost for the privilege! At the end of the lease period you simply hand the vehicle back.

What are the mechanics of Contract Hire and Leasing?

In calculating a rental the supplier will make an assumption as to the likely sale proceeds of the vehicle at the end of the lease (the residual value or the RV) If the vehicle sells for more or less than this value, the supplier will make a profit or loss respectively. You as the lessee have no financial interest in this profit or loss (agreement dependant) and as you do not have to pay the "residual value", you are only paying for what you use i.e. the difference between the initial cost and the residual value. This means that the monthly cost to rent the car is a lot more affordable, there is no acquisition or disposal concerns and depreciation is not an issue. It also stands to reason that those cars with higher residual values will thus cost less on a monthly basis.

What length can you contract hire or lease a car over?

Customers have the option to lease a car for 2, 3 or 4 years. 12 and 18 month contracts are now available however these are tend to be very specialised and more expensive.

What can I expect when I hand the car back?

As part of the car leasing agreement (be this via contract hire or through personal car leasing) you must agree to keep the vehicle in a good condition and maintain it according to the manufacturer’s recommendations. Good condition or "fair wear and tear" is defined by the BVRLA's (British Vehicle Rental and Leasing Association's) "fair wear and tear standard for drivers of contract hired and leased cars" A full copy of this guide can be obtained via our links page or by visiting www.bvrla.co.uk . An assessor will asses the car according to this guide and charge for any items/damage that is not considered "fair wear and tear"

What are the advantages to Contract Hire and car leasing?

1. Contract hire and car leasing can be a very cost effective means of funding a car when compared to the more traditional means of funding. This is due to a number of factors: You are not funding the entire balance of the car, you have a lower rate of interest built into the rental (this will almost certainly be lower than the interest rate your bank will charge you) and as explained earlier you are only funding the difference between the initial cost of the car and the residual (RV) value.

2. Low initial outlay as you do not have to contribute a large deposit. The industry standard is three payments upfront.

3. It offers hassle free, fixed cost and affordable motoring.

4. You get to change your car every couple of years (or as long as the agreement states).

5. There are no   acquisition or disposal hassles (as the leasing company sources the car for you and you simply hand the car back, at the end of the leasing period).

6. Individuals benefit from significant discounts which traditionally have only been the domain of large companies with fleets of vehicles.

7. You do not suffer huge monetary losses through depreciation.

8. You can afford to drive a better brand/model/higher specified car than the traditional forms of funding would allow.

9. Businesses who are making a taxable profit and who want an off balance sheet form of funding benefit from Contract Hire.

10. Businesses who are vat qualified can claim back 50% of the vat on the rental and 100% of the vat on the maintenance element thus further reducing their costs.

11. Fixed cost motoring if you choose a fully maintained option i.e. all servicing, parts and repairs are covered.

The fact that most prestige cars are funded through Contract Hire and leasing should provide a clue as to how the financially astute fund their cars. Why do they fund this way? Well prestige brands typically have better residual values and thus are much more affordable to lease.

With all of this in mind it is no wonder Contract Hire and personal car leasing has become such a popular means of financing new and used cars and vans.

Lastly the best description of why you should consider leasing comes from J Paul Getty who said that "if it appreciates-buy it and if it depreciates lease it!!

What are the disadvantages?

1. Early termination fees will apply if you hand back the leased car before the end of the agreed period. 
2. Loss of control. If you own your own your vehicles you can do as you wish and sell them as and when you prefer.   

What are the different forms of leasing? 

1. Business Contract Hire (BCH) 
2. Personal Contract Hire (PCH) 
3. Personal Contract Purchase (PCP) 
4. Contract Purchase (CP) 
5. Lease Purchase (LP) 
6. Finance Lease (FL)   

PERSONAL CONTRACT PURCHASE

Personal Contract Purchase is a method of car leasing finance which allows a consumer (private individual, sole trader or partnership) to buy a car on deferred payment terms that allow a series of options at the end of the agreement. The arrangement is that the buyer agrees to buy the vehicle and to make payments over a period of time. At the end of the period the buyer has one of three options:

1. Make the payment and keep the vehicle. 
2. Hand back the vehicle and have no further obligation. 
3. Use the equity in the vehicle (difference between the amount still owed and the market value of the vehicle) as a deposit for another vehicle. 

A Key feature of Personal Contract Purchase is the Guaranteed Future Residual Value (GFRV) also known as the GuaranteedMinimum Future Value (GMFV) This simply means that the finance company undertakes to buy the vehicle back at the end of the agreement for the pre agreed price ie. the (GFRV/GMFRV). This is a very valuable option as it means the risk to the buyer is reduced. Normally, if the car is worth more than the GFRV/GMFRV the buyer will opt to buy the car. If not they hand the keys back and look to buy another car! start again term you wish to keep the car you simply finance the balloon (or GFRV/GMFV) and the car is yours.

Hot Tip:

Unless the agreement states that the  residual value/balloon is guaranteed i.e. a GFRV/GMFV (See above or car leasing Glossary for definition) then it is NOT a Personal Contract Purchase! Some unscrupulous brokers and funders will sell you a Lease Purchase agreement with an un guaranteed residual value. This has the effect of making your monthly payments look nice and cheap however come the end of the agreement you may land up stuck with a balloon which is more than the market value of the car ie. you are in negative equity.

Benefits of Personal contract purchase:

1. A deposit can be tailored to suit your requirements. 
2. The monthly rental is cheaper as you are once again only financing the difference between the initial cost and the residual value. This means you can often afford a much better car than you would have been able to had you funded the vehicle through one of the more traditional means of ownership finance.  
3. The residual is guaranteed (GFRV/GMFV) so the risk of negative equity is reduced and there are no nasty surprises at the end of the contract. 
4. PCP's are widely available. 
5. Rather than just provide the finance a large number of PCP providers will also supply the vehicle which means the customer saves time. 
6. PCP's are often provided at a much lower rate of interest than if the lending was unsecured as the finance company retains ownership of the vehicle. 
7. PCP is an alternative to  Hire Purchase. 

Disadvantages of Personal Contract Purchase:

1. There are few disadvantages to PCP for retail customers. There was a lot of negative publicity concerning Guaranteed Future Residual Values (GFRV) however this was and continues to be largely a matter of opinion and perception. To explain in more detail, in recent years residual values on used cars have plummeted leaving buyers with negative or no  equity at the end of their agreement. Most buyers simply chose to hand the vehicle back but others felt that they had paid a deposit and monthly rentals but now "had nothing to show for it" This really is a case of bad press and perceptions as if there is no equity in the vehicle at the end of its term both parties lose out i.e. the customer and the finance company.        
2. In terms of business customers the two main disadvantages of PCP relate to: the fact that Personal contract purchase is an on balance sheet form of funding and for most tax paying companies it is more expensive (after tax) than contract hire for cars costing less than £12k. 

Who uses Personal Contract Purchase?

This form of finance is frequently used by company car drivers who have opted out of the company car scheme, by non-VAT registered businesses, by retail customers, partnerships, sole traders and of course by retail customers.

FINANCE LEASE: 

A finance lease is defined as a lease that transfers substantially all of the risks and rewards of ownership of the asset to the lessee. Finance leases allow the lesser to reclaim the VAT on the purchase price of the vehicle. They offer the flexibility to retain the use of the vehicle at the end of the lease for a modest annual outlay. Finance Leasing is mostly used as a funding option for companies who are comfortable administering their own vehicles and who want for accounting reasons, to show the vehicles as assets on their balance sheets. Companies typically choose from one of two options:

1. The firm agrees to pay for the entire cost of the vehicle including any interest over the lease period. 
2. The company reduces its monthly outlay by agreeing to pay the balloon or residual value at the end of the agreement.  

With a finance lease the customer never actually owns the vehicle. It must be sold to a third party and a portion of the sale’s proceeds (typically about 5%), together with any “Balloon Payment” must be paid to the relevant finance company.

BENEFITS:

1. Companies gain a further credit line. 
2. Companies get to combine a low initial outlay with low monthly costs. 
3. Companies get to reclaim 50% of the VAT on their repayments and claim hire rental tax allowances. This may or may or not be a benefit dependant on the firms accounting practices. 
4. The company shows another asset on their balance sheet. 
5. The company has equity in the sale proceeds of the vehicles.  

DISADVANTAGES:

1. Companies suffer "half the excess rule" corporation tax disallowance that also applies to expensive vehicles acquired on Contract Hire. 
2. The vehicles must be shown on your balance sheet. 
3. The company takes the residual value risk.  

CONTRACT PURCHASE:

Contract Purchase is widely used by companies but is also the basis of a very popular method of consumer finance called Personal Contract Purchase. Contract purchase is similar in many respects to contract hire with the prime difference being that Contract Purchase affords the owner the opportunity to buy the vehicle at the end of the contract period or simply hand it back. Contract Purchase is a niche product however which only represents about 5% of the fleet finance market, however its consumer counterpart "personal contract purchase" is a much more popular option. The product is particularly suited to companies who cannot fully reclaim VAT and it is most frequently used for the financing of more expensive vehicles on fleet.

CONTRACT HIRE AND PERSONAL CAR LEASING:

DISADVANTAGES:

Whilst we believe their is no better and more cost effective means of financing a car or van than Contract Hire or personal car leasing, this is only our opinion. Advice can only be classed as good advice if it considers the possible disadvantages of Contract Hire and personal car leasing.

Contract Hire and personal car leasing may not be good options of funding if you:

1. Prefer ownership and the perceived resultant flexibility this brings.
2. Prefer to buy everything using cash.
3. Are a business which is cash rich and/or your accountant or other financial advisors have advised that leasing is not the best means of financing for your business.
4. You need the flexibility to be able to sell the car very quickly. With Contract Hire and personal car leasing you would be charged early termination charges which will vary according to how much of the contract remains.

Have not considered and allowed for the other costs which come with owning or leasing a car. Remember that the monthly cost (whether it includes maintenance or not) is not your only cost. You do need to factor in insurance, fuel and repairs (if you have opted for a non maintained package)

SUMMARY:

Buying a car should be a pleasant process however it is more than often not!! If you want impartial advice, a no nonsense approach, an under promise over deliver philosophy, wholesale pricing on the vehicles and finance, guaranteed time and money savings and a true commitment to winning and retaining your business then look no further than Vehicle Alliance.