Is it better to buy a car on finance or use it on contract hire?

[Leasinoptions]

If you lease it you will never own it.

It’s just dead money.

If you own it and get into trouble, you can always sell it.



These are just a few common statements that come up from time to time. I have found that more often that not, all of the above statements were preconceived ideas inherited from peers.

As a nation we do like to own things, but when it comes to cars do we really need too?

I agree that if we intend on keeping a car for a long period of time it’s probably best to pay cash, or finance it with a bank loan or hire purchase.

But as the average time we keep a car is 33 months, I wonder if it really is in most people best interest’s buy a car on finance.

Car finance has changed significantly over the past ten years. Rates and deposits have come down, but the length of time we finance it over has gone up to five years in most cases - in an effort to make it affordable to the masses.

This creates a big problem for most. New cars depreciate fast, 17.5 % + £1000 in most cases as soon as you drive away.

If you have financed this with a low deposit over 4 or 5 years and you will most probably change after 33 months, you will most certainly have negative equity when you come to change.

Of course when you come to change the dealer will look after you. They’ll add on the negative equity to the next car, don’t worry about it, you can afford the payments, and so it continues. Loosing money hand over fist with the perception of ownership.

In reality, because it is on finance and we change every 33 months we will never own our cars this way.

Ok let’s look at Contract Hire.

A fixed term agreement based upon a predetermined annual mileage, Contract Hire removes the risk of depreciation and regularizes cash flow with a fixed monthly payment including road fund licence. Additional services can be arranged to include vehicle servicing and maintenance, tyres and exhaust replacements, breakdown assistance, and relief vehicle facility. The ability of the finance company to reclaim VAT on purchase reduces the monthly payment in comparison with a purchase plan. Blah, Blah, Blah

Ok what does that really mean in plain English.

You have the use of the vehicle for 2, 3 or 4 years.

You can then either hand it back or apply for a purchase price if you really want to own it via third party invoicing.

The overall cost of motoring is fixed, your payments are lower and you get to change your car frequently, if you choose too.

The finance company takes on board the risk of ownership.

You only pay the depreciation on the vehicle after corporate discount, not the total cost.

VAT is paid on the monthly rental, and if you are a business user and VAT registered you can claim back 50% of the VAT.

Contract hire is also available to non-VAT registered businesses and Private individuals.

So is leasing still dead money, or is it a more cost effective way to use a vehicle?



Aron Stevenson
Leasing Consultant

[Ian J]

Interesting and thought provoking post Aron.

It is many years since I kept a car for 33 months and equally as many years since I had a brand new car provided for me. I prefer to let someone else take the big hit and buy second hand

[Corabar Entertainment]

I am not disagreeing with you, it's a genuine question..... if it works out cheaper to lease over x number of years than it does to buy and then sell the vehicle, how do the leasing companies make their money?

[inbakumar]

Hi Angela,

The leasing/finance company makes money by:

(1) Negotiating significant "volume discounts" direct from the car manufacturers
(2) Claiming VAT/tax reliefs from the Government

The depreciation (most of) is a tax deductible expense for the finance company which means they can claim back a lot back from the tax man. Moreover, the leasing company will also be able to get the VAT back paid on purchases.

The above are the main reasons the contract hire is more cheaper route of owning cars [edit: owning is the wrong term here. With contract hire, the ownership is with the finance company. You merely have use of the car!] as the leasing companies pass on some of the savings (not all) to the customers.

Moreover, it is no coincidence that most of the large car leasing companies such as Lex, Jamjar and Godfrey Davies are owned by high street banks. It allows them to offset the depreciation costs against their huge profits.

What Aron didn't mention to you was that some leasing companies can be very aggressive when you hand back your car at the end of the leasing term usually around the intepretation of the "normal" wear and tear clause. Therefore, if you decide to go the contract hire route, do make sure that you take into account the reputation of the lender/leasing company and read the small print .

So can I have the contract hire order for your executive car please?

Hope business is doing well.

Regards,

[BMS]

Think that answer to the original question has been pretty comprehensive, but to add, that I would agree that contract hire is the pain free route as you have little or no pitfalls.

I would disagree that to finance a car you would end up with negative equity but it is still an extremely long term option and realistically if you are going to change your car on a regular basis it is not cost effective to finance the deal as the depreciation will kill the residual value of most cars with the exception of a few.

As IanJ states the second hand car market has some good bargins out there and personally unless I win the lottery and money is no problem, I would never buy new (actually paid £100 for a Rover 2.6 SDI, had a £50 hand respray and £40 for tuning the twin carbs - this was when cars had carbs - and had the car for 2 1/2 years ) and it is still one the best cars that I have ever owned and I've had a few in my time.

[Leasinoptions]

Joel

I work for a large reputable independent contract hire broker and we currently use seven funders who I’m sure you have heard of.

The bulk of our business is done through Lombard, Lex, Bank of Scotland and Automotive/Lease Plan the worlds largest leasing company. We are platinum partners and introduce more business to them than any other broker in the UK.

We currently MANAGE a fleet in excess of 18,000 vehicles and specialise only in contract hire and leasing.

Leasing companies make money financing the asset just like any other loan and also use the writing down allowances to offset against taxable profits – thus saving them millions in corporation tax.

As far as VAT benefits are concerned, the end user can reclaim 50% of the VAT on cars, and 100% is reclaimable on commercial vehicles and capital equipment.

We negotiate directly with the car manufacturers who offer discounts that are based on volume related bonuses. Just like any other wholesale environment, the more you buy the cheaper it gets.

People who abuse vehicles and return them damaged will have to pay to have them repaired in accordance with the terms and conditions of the funder.

Just because you don’t own the vehicle, it doesn’t mean that it should be abused and trashed does it?

However some companies used to make their money at the back end on rectification cost’s. We’re not that kind of company, and our customers are very loyal.

I am happy to answer any questions related to my specific field, so please feel free to contact me if you have any other questions or would like a highly competitive quotation.

Cheers



Aron Stevenson
Leasing Consultant


Contract Hire, Leasing, and Fleet specialists

[Wolf]

I've been involved with lease/contract hire for 10 years for a number of firms.

Watch out for:

1. Establishing the correct mileage on the contract. This is very expensive if you exceed it, and a huge waste of money if you don't reach the target mileage (you don't get anything back on the shortfall). If you have more than one vehicle it pays to get them from same company and to insist on 'pooling' of mileage over the vehicles so you have more flexibility. They won't like that but most will do it rather than lose a sale.

2. Damage on return. I do not want to speak ill of any company on this forum, but I've yet to find a single one who doesn't try this scam at the end of the contract. Do an inspection when it is collected by the driver (probably a sub-contract so couldn't care less apart from getting home) and get him/her to agree condition and mileage before you send it back (in writing). Take some pictures as well.

4. Only get a vehicle you need, not just one you fancy. Sounds obvious but too many drivers are tempted by the looks and only later discover what the tax implications are! Watch out for deisel surcharges as well, especially as most modern petrol cars are very economical.

5. Look at how much they are charging you if you have it with full maintenance. They will allow for frequent tyre changes, expensive servicing, and numerous other things you wouldn't necessarily do on your own car at the same rate. Obviously any contract car must be kept in reasonable condition and to the service schedule, but negotiate on this cost if added to the contract.

Other than that it does provide several years of pain free motoring, and well worth looking at as you have largely fixed-cost expeniture which is easier to budget for.

[inbakumar]

Aron:

(1) Read the forum guidelines. You shouldn't insert hyperlinks until you have posted 30 times.

(2) I fully understand what you do. My company has financed/leased a few vehicles to some of our clients. However it is not our main activity.

(3) Your statement re: VAT is incorrect. For a finance company, savings also comes from claiming back VAT paid to the vehicle manufacturer.

(4) I don't agree with your statement that your "company has a fleet of over 18000 vehicles". You are a BROKER and the fleet owner is the finance company, who provided the finance. Also I don't think you can call your company 'blue chip'. I'm sure/hope it is a reputable company though.

Wolf:

(1) I think some of your statements are alarmist as several thousands of vehicles are leased every year by companies in UK. In my capacity as CFO in my previous life, I have entered into on behalf of my employers large fleet contracts so I know the savings and other implications. The new development is that 'leasing' is an option for private customers now.

(2) Leasing is a viable business model because the 'savings' made by the leasing/finance companies are genuine (see my first post above).

(3) We have seen 'excess' mileage charges of 2p per mile as well as 25p per mile so it depends who you deal with. Therefore an excess mileage of 1000 could cost you £20 or £250. The moral of the story - read the small print carefully.

(4) I agree with you on the other issues. Unfortunately, a number of cow boys have moved into the industry making it difficult for the whole industry. They charge an artificially low monthly fee and then screw you at the end of the contract .

Regards,

[Wolf]

Joel,

accept what you say in general, but personal experience is that deals can be negotiated over standard terms, and if you get mileage pretty close first time costs are saved. Don't mean to be alarmist, but do want to make sure people realise you don't simply have to tale what's offered.

Totally agree with you on the 'blue chip broker' points.

Phil

[Nurds]

Hello.
Great thread, loads of useful information.
I have a question I would like guideance on if possible:
I am currently 20 months into a 24 month fixed term contract hire agreement with LEX. What are my options if I want to return the vehicle early? Someone has told me that I can do this without paying the final 4 instalments!? Your guidance would be much appreciated.
Nurds.