Very simple. You effectively rent the vehicle for a fixed period of time based on an agreed mileage.
Typically a contract runs for three years, as it matches most manufacturer warranties, but you can contract hire over 2, 3, 4 or 5 years. Basically the longer the term then the lower the monthly rental.
At the end of the contract you would normally replace the vehicle with something else, or you can simply hand the keys back and return the vehicle.
You can add a service and maintenance package if required but unless you are doing 20,000 miles a year then we wouldn’t generally recommend it. The largest cost in a maintenance budget is tyres so unless you are doing some serious mileage there is little point ‘insuring’ your tyres for replacement.
Contract hire is all based around residual values. E.g. A van costs £20,000 and, with 30,000 miles on it, is worth £5000 in three years. You effectively pay the depreciation of £15,000 plus the cost of borrowing the money. Therefore, the higher the value at the end then the less depreciation there is to pay and the less the monthly payments are.
A good example of this in practice is the Vauxhall Vivaro Sportive. The Sportive v an is actually cheaper on contract hire than the standard van as the Sportive is worth so much more at the end of the contract because of all the extra options it has on it like Air-conditioning and Bluetooth.
For the same reasons vans like Mercedes and Volkswagen are particularly good on a lease. The first reason is very simple; They hold their value and are in demand as used vehicles. The second reason is a bit more complicated. Vehicle manufacturers like Mercedes and Volkswagen are a bit obsessive about their brand and protecting the residual values of their vehicles. They don’t supply huge numbers of vans and they carefully control their pricing. Therefore never buy a Volkswagen Transporter for cash or on Hire Purchase. The discount will be next to nothing as VW don’t want the market to know what they are discounting the vehicle by. However, lease or contract hire a Transporter and it is not much more than a new Transit Custom, if you know where to look. And obviously we do!
Advantages:
- Minimum capital expenditure
- Accurate monthly budgeting
- Improved cash flow
- Fixed interest rates
- Rentals can be offset against the businesses profits.
- Reduced administration
- On-going advice and support
- Road Fund Licence provided (vehicle excise duty paid) for duration of contract
- Optional maintenance package
- Optional breakdown rescue cover
- Optional replacement vehicle cover in event of breakdown
- Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company
Disadvantages:
- Early termination can be expensive
- If you do more miles than stated in your contract you will be charged excess mileage for each mile over that stated in your contract
- You must look after the vehicle and return it in a well maintained condition otherwise you will be charged for any damage over and above that stated in the ‘Fair Wear and Tear Guide’
- You must have fully comprehensive vehicle insurance
- You will never own the vehicle as there is no option to buy it
