Last Updated on Mar 13, 2020 by James W
When you’re in need of a new car for your business there are several factors influencing how you finance it that you’ll want to look at. Understanding the financial implications of either leasing or buying a vehicle is paramount if you want to get the best value for money. We’ve put together a guide to the benefits and the downsides of each to see if contract hire or buying is the best for you and your business.
The Benefits of Contract Hire
Contract hire allows you to pay for the use of the car in regular instalments, similar to if you were to take out a car loan, however there are some key differences of which you should be aware.
With contract hire you might be able to access higher spec vehicles than you would usually be able to afford. This is due to the way business contract hire works vs. a car loan. Car loans are based on the full price of a car whereas with hiring, this is only based on a certain percentage of the overall price of the car: the time in which you’ll be using it before the contract expires, typically 3 to 5 years.
As an example, on a £20,000car the entire purchase price would have to be financed with a car loan. Compared to contract hire, you’ll only have to pay the difference between purchase price and resale value at the end of the agreed contract.
Continuing with the example above; if the residual value of the car is 50% after 5 years, you’ll only have to pay off £10,000 over those years. Down payments typically range from 1 to 12 months’ worth of payments in advance depending on your situation and this reduces your monthly costs the higher the down payment.
Again, the down payment amount is negotiable so you can have the flexibility to change payments depending on your situation. So, if you wish to only put down the minimum down payment, monthly payments will be higher, however the overall cost will be the same. The best option to choose depends on your cash flow situation.
As mentioned, typically,contract hire contracts run between 2 to 4 years which, incidentally, is the manufacturer’s warranty period for most vehicle makes. This means vehicles are covered under warranty for repairs for the whole duration of your contract. Any additional warranty can be added onto your contract if you’re opting for a longer term contract. You can also fully customize your vehicle, as often they’ll come direct from the factory, allowing you to keep up to date with the latest technology and mod cons.
So, if you’ll need a new vehicle every few years and need the safety of the latest technology and manufacturerwarranties, contract hire is a great option. At the end of your contract you’ll have the option to simply hand the vehicle back, upgrade to a new vehicle with a new contract or continue by renewing the contract.
There are a few caveats however; mileage must be agreed in advance and any additional damage not deemed normal wear and tear must be rectified beforehand. If you exceed your mileage, you’ll incur additional fees as the vehicle will have devalued at a faster rate than previously calculated.
As cars are depreciating assets, it’s a good idea to keep them off your asset list to help with your balancing your books. You won’t have cash invested and depreciating, so the costs of the contract hire agreement can be classed as tax deductible in lieu with other business costs.
Advantages of Buying a Business Vehicle
If you’re looking to keep a new vehicle for a long time, then buying can be advantageous if you don’t need the latest model vehicles and have cover in place for accidents, breakdowns or maintenance.
Additionally, if you own the vehicle you’ve got no mileage restrictions so if you are intending to be on the road covering distances in excess of 10,000 miles per year for more than 4 years, then buying can be a better option.
Again, you won’t necessarily have to repair the vehicles before wanting to get rid of them, if you’re intending on running them until they are scrapped or of a low value. Contract Hire generally keeps the value of the vehicle through mileage restrictions and excess wear repair requirements, so it depends in part on the nature of your vehicle usage, be it driving to meetings or loading up with trade goods.
Disadvantages of Buying a Business Vehicle
When you buy a car there’s a lot of uncertainty surrounding the resale value, which is heavily dependent on demand, total mileage, wear and tear and make or model. It’s a bit of a roll of the dice, plus, remember add in seller fees or the hassle of negotiating a fair price and you’ve got a mini-nightmare on your hands. With contract hire you don’t have any of this, the final value of the car is set, so you know how much it is going to cost during the time it’s being used by you.
Additionally, a significant deposit is required when buying on finance. Typically this is between 10 and 20 per cent when taking out a financial package for a vehicle, so the £20,000 car is going to need £2,000 to £4,000 up front, plus the monthly payments.
The shorter term nature of these contracts outweighs the long term payments for a car loan, which can stretch more than 7 years, by which time the average vehicle will have depreciated significantly. A downside to the long payments schedule is the added interest; the longer the loan period the more the interest payments will creep up.
As covered above, there isn’t a fixed answer for everyone and it depends heavily on your personal circumstances.