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Contract Hire Or Contract Purchase - What Are Your Choices?

Sep 4, 2007
In today's financial climate more and more businesses and private individuals are moving away from buying their vehicles with cash or a bank loan and looking at better alternatives, which are both more tax efficient and cost effective.

Contract Hire

One of the most popular schemes is contract hire, which is now available to private individuals via PCH(personal contract hire) as well as the long established BCH(business contract hire) for business users. In a nut shell these type of contracts allow you to 'hire' the vehicle of your choice for a set period usually between 12 & 60 months, with a low initial rental (usually equivalent of 3 x the actual monthly rental)and at the end of the contract it is simply returned to the funder, with absolutely no residual burden for the user.

Contract hire is much more affordable from a monthly payment point of view as you are not paying for the full price of the car over your agreed rental period, you simply pay for a percentage of the price, basically you pay the (initial cost of vehicle) minus (the funders estimated future residual value + Interest), therefore if your chosen vehicle has a strong residual then your monthly payments would be much cheaper than those of a car with a poor residual.

In Layman's terms you could have an Audi or BMW for the same monthly rental as say a Mondeo or Passat. With your contract hire contract you can also choose to add full maintenance which means the cost of all standard servicing, replacement tyres, exhausts and batteries (due to fair wear & tear) are included, meaning that you have a 'no-worries' contract where you can budget confidently for a vehicle for the full contract term in the knowledge that you wont be getting any nasty surprise servicing bills.

So to sum up the main benefits of contract hire to both business & personal clients are as follows:

* Vehicle is shown off balance sheet(protects gearing ratios) (Business Users)
* Accurate monthly budgeting
* Improved Cash flow(Low initial outlay)
* Fixed monthly rentals unaffected by interest rate rises.
* Elimates all risk on residual values and maintenance costs(Full maintenance)
* 50% of VAT is recoverable for VAT registered businesses on monthly rentals & 100% on the service element if a full maintenance contract.
* Road fund licence included for entire contract.
* Percentage of the rentals allowable against tax(Business Users).

Contract Purchase

This is an alternative type of contract that gives you similar benefits to contract hire but with the option to purchase your vehicle at the end of the contract, this is called Contract Purchase and as before can be done through your business or personally for private individuals.

As with contract hire there is a low cost of entry, usually a minimum deposit (3 x your monthly payment) and typically you can take a contract over a period from 12 to 60 months. At the point of negotiation of your contract the funder informs you of what the GFV (guaranteed future value) of your vehicle will be, and that is a fixed value it cannot be changed by the funder at any point once the contract is agreed.You can also as per contract hire choose to take your vehicle with full maintenance included for extra piece of mind and tighter budgetary control.

But where it differs to contract hire is that instead of the vehicle simply being collected from you by the funder at the end of contract, with contract purchase you have 3 choices:

1. You can choose to simply hand the vehicle back to the funder without making the final payment(the GFV) and would be 100% free of any further penalties(unless you had gone over agreed contract mileage or damaged your vehicle)
2. You may decide you want to keep the vehicle and you can choose to refinance over an extended period.
3. Or finally you simply pay the final payment(GFV) and keep the vehicle so that you could sell on privately or part exchange for another vehicle.

The other added benefit from a business perspective is that the vehicle is seen as an asset on your accounts and therefore you are able to write down a proportion of its value against your profits.
About the Author
Shaun Parker has been at the forefront of the contract hire and car leasing industry for several years now, arranging finance for hundreds of satisfied customers.
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