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Whatever happened to car hire purchase?
Why has this method of financing cars that was so popular, lost its appeal over the past ten years? Certainly it was most company's first choice when it came to purchasing company cars. One way or another it seemed very important to them that they eventually owned the vehicles. Car leasing has been around for quite some time but for a long time many companies resisted this form of finance.
If you consider the interest differential between the funds on deposit and what they will pay in interest for example on a hire purchase agreement it doesn't particularly make financial sense. So why do companies often take out a vehicle leasing contract when they have the money sitting in the bank?
Nowadays most cars come with a three year warranty and with modern cars being so prone to electronic problems; companies are loathed to keep them once the warranty has expired. Which begs the question, what is the benefit of owning company cars, if you are going to sell them as soon as you have finished paying for them?
Nevertheless there remained resistance to leasing, or contract hire as we tend to refer to it in the UK. More so with individuals acquiring a vehicle; even when you could demonstrate on paper, that it was a more cost effective finance option for them, they would struggle with the concept that they would never own their car.
Companies however started to do the sums and realise that if contract hire improved their cash flow, was more flexible and allowed them to borrow off balance sheet, then did it really matter that they didn't own the company vehicles? Then there were occasions when the residual value of vehicles was extremely hard hit, most recently in 2008 and companies started seeing vehicle ownership as more of liability than a benefit, particularly as it is the contract hire company that suffers the loss when residual values drop.
Sometimes if a vehicle is going to do very high mileage it can appear more attractive to purchase rather than leasing, because the contract hire rate has increased with the increased mileage. Indeed there are occasions where purchasing is more cost effective However one must remember that the reason that it appears expensive is because the lender is anticipating a lower residual value due to the increased mileage, a purchaser will suffer that same reduction in value when they come to sell it.
Another worry with regard to leasing was being tied to a three year term and suffering high penalties if there were a change in the company's circumstances and they wanted to cancel the contract. Of course if you try and settle a hire purchase agreement early, you will also be penalised, because most car finance companies will use what is know as The Rule of 78 to calculate the settlement, which can make it very expensive to settle an agreement early.
Ultimately as to whether a company opts for outright purchase of its cars or leasing will often be a decision that is partly financial and partly emotional. There is however no doubt that it can be quite enjoyable handing back a contract hire car, when it has dived in value and its current value and disposing of becomes someone else's problem.
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