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Car Finance, The facts of Contract Hire and Vehicle Leasing

American Government Special Collections Reference Desk

Car Finance, The facts of Contract Hire and Vehicle Leasing

Cole Branel
June 27, 2006

Business Vehicle, Contract Hire If your business normally buys cars with cash, a bank loan, or through a traditional Hire Purchase scheme, you may find Contract Hire a far more cost-effective option.

Under current VAT legislation, lenders are able to reclaim the VAT on your business's New or 'VAT qualifying' used vehicle (less than 3 months old). This saving is then passed on to your business in the form of lower monthly rentals, fixed throughout the agreement. Not only does Contract Hire allow your business to run a new vehicle for an inclusive monthly rental but it also releases valuable capital back into your business. This means your business could afford an even better vehicle than you initially thought.

Routine servicing and maintenance costs can be included for a small increase to the monthly rentals. All scheduled maintenance work will be carried out by the main dealer network, at a dealer of your choice. Maintenance** packages include replacement tyres (excluding punctures), batteries, exhausts and all parts that are subject to fair wear and tear.

At the end of the agreement the vehicle is collected thereby avoiding time-consuming disposal and any worries over depreciation of the vehicle*. Annual Road Fund Licence is included in the monthly rental for the duration of the contract.

For VAT registered businesses***, VAT is reclaimable on the rentals, based on 50% of the VAT on the capital element (assuming an element of private use) and 100% of the VAT for any maintenance charges.

Key Benefits** of Business Contract Car Hire:

Low initial outlay from just 1 months payment Flexible terms from 12 to 60 months Road fund licence included in the monthly rental Choice of rental period No depreciation risks Ability to show the vehicle off your balance sheet Proportion of the rentals allowable against tax Optional monthly maintenance packages Optional Gap Insurance protection Lowest fixed monthly rentals No time consuming disposal issues More capital available for your business Vat reclaimable on the rentals*** Complete peace of mind * Excess mileage and vehicle damage charges other than fair wear and tear may be payable. ** Subject to terms and conditions of the agreement. *** VAT registered businesses*, VAT is reclaimable on the rentals, based on 50% of the VAT on the capital element (assuming an element of private use) and 100% of the VAT for any maintenance charges.

Personal Contract Hire Personal Contract Hire allows you to drive the vehicle of your choice without ever owning it. You simply hire your new car for a period of time, between

12 and 60 months. At the start of the agreement a low initial deposit is required, usually 3 monthly payments in advance. Then the amount you pay each month is fixed for the length of the rental period, which means that you also benefit from easy budgeting.

Monthly rentals are minimised in two ways. The lender is able to reclaim VAT paid on the purchase price of the car, and the saving is passed on to you in the form of reduced monthly rentals. In addition the estimated value of the car at the end of the rental period is taken into account, so the stronger the residual value of your new car the lower your monthly payment will be.

At the end of the agreement the vehicle is collected thereby avoiding time-consuming disposal issues and any worries over depreciation of the car**.

Routine servicing and maintenance costs may be included for a small increase to the monthly rentals. All scheduled maintenance work will be carried out by the main dealer network, at a dealer of your choice. Maintenance packages** include replacement tyres (excluding punctures), batteries, exhausts and all parts that are subject to fair wear and tear.

Personal Contract Hire offers a simple and cost-effective solution to driving the vehicle of your choice.

Key Benefits** of Personal Contract Hire or PCH

Low initial outlay from just 1 month's payment Flexible terms from 24 to 48 months Fixed rentals Choice of rental period Lowest possible fixed monthly rental No depreciation or disposal issues No final payments Road fund licence included Optional monthly maintenance packages Optional Gap Insurance protection Complete peace of mind * Excess mileage and vehicle damage charges other than fair wear and tear may be payable. ** Subject to terms and conditions of the agreement.

Business Contract Purchase for New Vehicles Business Contract Car Purchase is a highly flexible and affordable way of driving your new vehicle.

You pay an initial deposit, followed by a series of fixed monthly payments over an agreed period between 12 and 60 months. Your payments may be significantly lower than anticipated because the predicted value of your new vehicle at the end of the agreed period is taken into consideration. For this reason your company may find that you can choose from a wider range of cars than you originally thought.

Business Contract Car Purchase can ease cash flow and free up valuable capital that can be used more effectively elsewhere within the business. This option provides your business with a number of benefits. The car appears as an asset in the accounts and a proportion of its value can be written down against profits. Interest payments are allowable against tax, and taking up the maintenance option will save you administration time and avoid unexpected bills.

Business Contract Car Purchase gives you flexibility at the end of your agreed contract period. Your company has the option to own the vehicle but with the security of a guaranteed future value should the vehicle be worth less than the anticipated value.

This means you have 3 options at the end of your agreement:

Option 1 Make the payment and keep the vehicle.

Option 2 Extend the agreement by spreading the final payment over a further period.

Option 3 Return the vehicle without making the final payment*. This releases you from further obligation except for excess mileage and vehicle damage charges should the estimated mileage agreement be exceeded or any damage be considered greater than fair wear and tear.

Key Benefits** of Business Contract Purchase:

Low initial outlay from just 1 months payment Flexible terms from 24 to 48 months Fixed rentals Choice of rental period No depreciation risks Option to purchase the vehicle at the end of the agreement Ability to show the vehicle on your balance sheet Can be written down against profits Optional Gap Insurance protection Complete peace of mind * Excess mileage and vehicle damage charges other than fair wear and tear may be payable. ** Subject to terms and conditions of the agreement.

Personal Contract Purchase for new cars Personal Contract Car Purchase is a highly flexible and affordable way of driving your new vehicle.

You pay an initial deposit, followed by a series of fixed monthly payments over an agreed period between 12 and 60 months. Your payments may be significantly lower than anticipated because the predicted value of your new vehicle at the end of the agreed period is taken into consideration. For this reason you may find that you can choose from a wider range of cars than you originally thought.

Routine servicing and maintenance costs can be included for a small increase to the monthly rentals. All scheduled maintenance work will be carried out by the main dealer network, at a dealer of your choice. Maintenance** packages include replacement tyres (excluding punctures), batteries, exhausts and all parts that are subject to fair wear and tear.

Personal Contract Car Purchase gives you flexibility at the end of your agreed contract period. You have the option to own the vehicle but with the security of a guaranteed future value should the vehicle be worth less than the anticipated value.

You have 3 options at the end of your agreement:

Option 1 Make the payment and keep the vehicle.

Option 2 Extend the agreement by spreading the final payment over a further period.

Option 3 Return the vehicle without making the final payment*. This releases you from further obligation, except for excess mileage and vehicle damage charges should the estimated mileage agreement be exceeded, or any damage be considered greater than fair wear and tear.

Key Benefits** of Personal Contract Car Purchase or PCP

Low initial outlay from just 1 months payment Flexible terms from 24 to 48 months Fixed rentals Choice of rental period No depreciation risks Option to purchase the vehicle at the end of the agreement Optional monthly maintenance packages Optional Gap Insurance protection Complete peace of mind * Excess mileage and vehicle damage charges other than fair wear and tear may be payable. ** Subject to terms and conditions of the agreement.

Business Finance Lease

Business Finance Lease is a straightforward rental agreement that offers significant tax advantages, particularly if your business is VAT registered. Business Finance Lease is designed to make budgeting easier for your business.

With a 'Balloon**' style Finance Lease you can reduce your monthly rentals even further because the car's estimated resale value is taken into account when the rental payments are calculated. The estimated value is then offset to the end of the agreement, thereby reducing your rental payments. At the end of your lease agreement, you must sell the car to an unconnected third party.

With a Finance Lease your sales proceeds will first need to cover your outstanding 'balloon' payment and any balance will then be refunded to you. Any shortfall remaining from the 'balloon', however, will be your responsibility to settle.

Like Business Contract Hire for VAT registered businesses***, VAT is reclaimable on the rentals, based on 50% of the VAT on the capital element (assuming an element of private use) and 100% of the VAT for any maintenance charges.

Routine servicing and maintenance costs can be included for a small increase to the monthly rentals. All scheduled maintenance work will be carried out by the main dealer network, at a dealer of your choice. Maintenance** packages include replacement tyres (excluding punctures), batteries, exhausts and all parts that are subject to fair wear and tear.

It is important to stress that whilst you may benefit from the sale of your vehicle you could also be required to cover the potential shortfall. Finance Lease does not offer complete peace of mind and customers looking for no vehicle disposal issues would be better suited to Business Contract Hire.

Key Benefits** of Business Finance Lease:

Low initial outlay from just 1 month's payment Flexible terms from 12 to 60 months Choice of rental period Ability to show the vehicle off your balance sheet More capital available for your business Improved cash flow You could benefit from the sale of the vehicle to a third party VAT reclaimable on the rentals*** Optional monthly maintenance packages ** Subject to terms and conditions of the agreement. *** VAT registered businesses*, VAT is reclaimable on the rentals, based on 50% of the VAT on the capital element (assuming an element of private use) and 100% of the VAT for any maintenance charges.

Hire Purchase for Cars Suppliers, supply the vehicle and you pay a monthly amount for an agreed period and ultimately you own the vehicle. The details of the agreement can be tailored to your needs and budget, based on initial payments and /or final balloon payment.

Key Benefits Hire Purchase:

Lower initial outlay than outright cash purchase The vehicle appears as an asset on your balance sheet You can claim capital allowances A choice of fixed or variable interest rates Interest on repayments can usually be offset against taxable profits Disadvantages: monthly repayments are normally higher than with contract purchase and you cannot reclaim VAT on the vehicle's purchase price. You are responsible for all the risks of owning , administering, running, maintaining and disposal of the vehicle.

Sale & Lease Back Owning your fleet used to be a viable option for cash-rich companies but the recent steady fall in secondhand car values is leaving fleet owners exposed to unexpected losses. As a result, increasing numbers of companies are turning to contract hire instead. Sale & Leaseback allows companies to switch the entire fleet immediately to contract hire without changing a single vehicle or alternatively have the entire fleet replaced.

Key Benefits of Sale and Leaseback

Release capital tied up in the fleet, which can be redirected to your core business Eliminates the risk of depreciation and hassle of disposal Makes budgeting easier since you pay a fixed monthly amount under your contract hire agreement Gives you the option of including maintenance costs, relief vehicles and roadside assistance in the fixed monthly payment Offers VAT savings by removing your fleet from the balance sheet Improves your company's borrowing potential Allows an immediate change to contract hire without any operational implications for your vehicles or drivers All the normal benefits of Contract Hire (see above) Sale & Leaseback usually makes far more financial and administrative sense than a gradual changeover to contract car hire.

You can find out more information at http://www.vehicleoptions.biz/

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