Contract Hire vs Hire Purchase vs Lease Purchase

How to finance my next company vehicle is a frequently occurring conversation I have with clients every week, and as an experienced finance broker, I'm here to demystify the differences between leasing and hire purchasing a vehicle for your business.

When it comes to funding a car for your business, you'll encounter various terms - some accurate, some misleading, and some downright incorrect. So, let's first clear up the confusion:

Contract Hire and Hire Purchase are legitimate business funding options. Lease Purchase and Hire Purchase with Balloon are also legitimate terms. However, be cautious when you hear 'PCP' mentioned for business finance. Despite being sometimes referenced, it's not actually designed for businesses – as outlined in the name: PERSONAL Contract Purchase.

In this post, I will touch on the pros and cons of the different funding options for your business. Remember, each business has its unique requirements, so one option isn’t necessarily better than another. The purpose of this post is to help you make a more informed decision.

Contract Hire (Leasing)

What is Contract Hire?

Contract Hire, also known as leasing, is essentially a long-term rental agreement for a brand-new vehicle. Your business pays a fixed monthly fee to use the car for a set period, usually between 2 & 4 years. At the end of the lease term, you simply return the vehicle to the leasing company. You don’t own the car at the end of the contract, and you won’t have to worry about the car's depreciation. Maintenance and servicing can also be included, simplifying running costs and budgeting.

Who is Contract Hire for?

Contract hire is ideal for established businesses with predictable forecasts seeking fixed monthly payments. It’s perfect for avoiding vehicle depreciation risks and suits businesses regularly updating their fleet with the latest models. It’s also ideal for companies needing shorter-term vehicle use, such as leasing an electric car to hedge against uncertain long-term value or future technology changes.

Hire Purchase & Lease Purchase

What is Hire Purchase & Lease Purchase?

Hire Purchase and Lease Purchase are purchase agreements. The vehicle appears as an asset on your balance sheet, with the corresponding finance shown as a liability, potentially offering tax benefits through capital allowances and interest deductions.

The difference between Hire Purchase and Lease Purchase is that at the end of a Lease Purchase, you have an offset balloon payment (also referred to as Hire Purchase with Balloon).

Hire Purchase Gives You Flexibility in Vehicle Choice:

These agreements can be used on new and used vehicles, offering a wider choice of cars and the potential for good buys. You're not restricted to purchasing from a main dealer; independent garages, private sales, and auction purchases are also viable.

Payment Structures of Lease Purchase and Hire Purchase:

Typically, you pay a deposit (though zero deposits are possible) and then fixed monthly payments. Agreements usually span from 24 to 60 months. With Hire Purchase, when the agreement ends, and you’ve made all the payments, the vehicle belongs to you. With Lease Purchase, there is a final balloon payment, agreed upon at the start based on your annual mileage. This option might help your monthly cash flow but will result in higher total interest charges and less equity at the end.

Lease Purchase Comparison to PCP:

Lease Purchase is similar to PCP but without the option to hand the car back at the end. You're liable for any shortfall if the car is worth less than the balloon payment.

Who is Hire Purchase for?

Hire Purchase is ideal for businesses looking to add long-term value to their assets, aiming to build equity in their vehicles and offering the benefit of eventual ownership. Lease Purchase suits businesses wanting the flexibility of lower monthly payments with the potential to own the vehicle at the end. It's perfect for companies needing high-value assets without significant upfront costs, as well as those that can manage a balloon payment at the end of the finance period.

Pros and Cons of Contract Hire, Hire Purchase and Lease Purchase:

Contract Hire

Pros:

• Predictable Cash Flow: Fixed monthly payments.
• Avoids Depreciation Risks: No responsibility for resale value.
• Lower Initial Costs: Minimal upfront payment & potentially low monthly instalments.
• Maintenance Options: Often includes maintenance packages.

Cons:

• No Ownership: You don’t own the vehicle at the end of the term.
• Mileage Restrictions: Potential penalties for exceeding agreed mileage.
• Less Flexibility: Harder to exit contract early & restricted to new cars only.

Hire Purchase

Pros:

• Ownership: You own the vehicle at the end of the term.
• Equity: Payments contribute to asset ownership.
• No Mileage Limits: Use the vehicle without mileage restrictions.
• Flexibility: More flexible terms compared to leasing.

Cons:

• Higher Monthly Payments: Typically higher monthly payment.
• Depreciation Risk: Responsible for the vehicle’s depreciation.
• Maintenance Costs: You bear all maintenance costs.

Lease Purchase

Pros:

• Lower Monthly Payments: Due to the final balloon payment.
• Ownership Option: Option to own the vehicle after the final payment.
• Equity: Potential to own a valuable asset.
• Flexibility: Can manage cash flow effectively with lower initial payments.

Cons:

• Balloon Payment: Final payment required.
• Depreciation Risk: Responsible for depreciation.
• Maintenance Costs: You bear all maintenance costs.

I hope this has shed some light on the topic. There is another aspect to consider - the tax implications. However, as it's nuanced for each business, I recommend speaking to your accountant about the best option for your specific business.

If you’re looking to fund your next company car or fleet of vehicles, or if you’re just curious to learn more, please feel free to reach out to James Murray Finance. We’re happy to help, and there’s no charge for an initial consultation since the banks pay us a commission for introducing new business.

To watch my video where I explain more about this topic CLICK HERE

Thanks for reading!

James

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Frequently Asked Questions

Q. Can a newly registered company finance a company car?

Yes, it's possible for a newly registered company to finance a company car, but it may be more challenging. Lenders typically prefer businesses with a proven trading history. However, some specialist lenders may consider your application if you can provide a strong business plan, proof of contracts or orders, and potentially a personal guarantee from the company director(s)

Q. How can I improve my new company's chances of being approved for car finance?

To improve your chances of approval:

• Prepare a detailed business plan showing projected income and expenses
• Maintain clean personal credit histories for all directors
• Consider offering a larger deposit
• Start with a more modest vehicle choice
• Ensure all company paperwork and accounts are up to date and accurate
• Build relationships with potential lenders before applying

Q. How does mileage affect my finance agreement?

For Contract Hire, exceeding the agreed mileage can result in additional charges at the end of the agreement. With Hire Purchase or Lease Purchase, there are no mileage restrictions, but higher mileage can affect the vehicle's resale value, which is particularly relevant for Lease Purchase agreements with a balloon payment.

Q. Is it better to lease or buy a company car?

There's no one-size-fits-all answer. It depends on factors like your company's cash flow, how long you plan to keep the vehicle, and your attitude towards asset ownership. Leasing (Contract Hire) offers lower upfront costs and fixed monthly payments, while buying (Hire Purchase or Lease Purchase) allows you to build equity in an asset. Consider discussing your specific needs with a finance broker to determine the best option for your business.

Q. Can I finance a used car for my business?

Yes, you can finance a used car for your business through Hire Purchase or Lease Purchase agreements. Contract Hire is typically only available for new vehicles. Financing a used car can be a cost-effective option, especially for smaller businesses or those looking to maximise their budget.

Q. Can I buy the car at the end of a Contract Hire agreement?

Generally, Contract Hire doesn't offer a built-in option to purchase the vehicle at the end of the term. However, some leasing companies may allow you to make an offer to purchase the vehicle at its market value. This is not guaranteed and would be subject to negotiation.

Q. What happens if I want to end a Contract Hire agreement early?

Early termination of a Contract Hire agreement usually involves penalties. The exact cost will depend on your contract terms, but it often involves paying a percentage of the remaining rentals. It's important to carefully consider the length of the agreement at the outset.

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