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Vehicle Financing: Business & Personal Hire

A very common way for both individuals and businesses to access new vehicles is via a contract hire agreement. In short, it is a financing agreement which involves an initial deposit, followed by regular/monthly payments and at the end of the agreed term, the car is given back to the company which provide the finance.

Vehicle Financing

You may have heard of 3+9, 6+18 or 9+27 contract hire? This way of describing the deals basically refers to how many months deposit & how many months of regular payment are required. In addition to how valuable the car is (and this includes optional extras such as non-standard paint finishes or interior, exterior, safety or engine upgrades) the number of miles projected to be driven every year impacts the depreciation of the car.

Average mileage is 10-12,000 miles per year so if a vehicle is travelling 20-30,000 miles per year it is likely to experience more wear and therefore have a lower residual value to a lower mileage car. Therefore, the finance company charge a higher rate to those who travel further per year in order to negate the additional depreciation.

The projected mileage is agreed upon at the start of the term and often carries significant penalty if it is exceeded (probably to both discourage the exceeding of mileage and again make up for the additional depreciation).

As the vehicle is returned to the finance company at the end of the agreed term, it’s essential that any damage is repaired by the individual/business before returning the car.

The difference between Business and Personal car hire is largely to do with VAT and how the deals are advertised. A business contract hire agreement will be subject to VAT of which usually 50% can be claimed back and usually, the deals/offers will be advertised with prices exclusive of the VAT. Personal hire contracts are exactly the same as business ones and follow exactly the same format, but the VAT cannot be reclaimed.

If you are unable to secure a business hire, there are still advantages to personal hire. Notably, the cost compared with that of buying a new car. As well as lower monthly repayments than a traditional car loan, you’re likely to run into less running costs as contract hire is almost always for brand new cars. A brand new car is less likely to have mechanical faults and also does not require MOT tests for the first few years.

The downside, is that you can’t usually part exchange a car when starting a new contract hire. This means you’ll need to find cash for the initial deposit. Fortunately, there is an alternative to the usual private sale route in the form of online car buying service The Car Buying Group. This makes the process much faster & simpler as they will collect your old car from your address and make instant payment to your bank account – perfect if you require funds to start your business or personal hire contract.