Something that we get asked a lot about is whether it is better to lease or buy a vehicle and indeed whether it is better to do this personally or through a business? Kenny Logan is in the driving seat on this one.
With new vehicle prices continually rising and the value of used vehicles declining, the cost of owning a car is on the increase. Because of this, it is commonly accepted that there is little or no benefit in purchasing most new vehicles outright because of the steep depreciation involved. For this reason, more and more of today’s forward thinking businesses are looking for a more cost effective way of acquiring their vehicles.
At one time you either saved up and bought a car outright or paid it up under a hire purchase agreement, but huge changes in the industry have meant that options have come a very long way for the business and private motorist alike. There is a plethora of different options open to you, each having their own particular benefits and potentially downsides that you need to be aware of before you drive out of the garage with your new car!
To help you choose the best option for you and your circumstances, here is a guide to some of the different methods along with the pros and cons of each.
This type of arrangement describes the leasing of a vehicle, normally to a VAT registered business, for a set period of time and for a specified mileage. At the end of the contractual period the vehicle is then returned to the supplier.
The client is required to pay a fixed amount each month over the life of the contract with an initial fee (usually equivalent to three months rental), required up front. Roadside rescue and maintenance are optional extras which can be charged to the monthly rental payment.
Contract hire removes all of the risks and costs relating to vehicle ownership including depreciation, servicing and disposal of the vehicle and because the vehicle is owned by the finance company it does not have to be shown as an asset on the company’s balance sheet.
This method is ideal for companies who cannot fully reclaim VAT and is particularly suitable for financing more expensive cars. It combines all of the operational benefits of contract hire together with the tax benefits of ownership, such as the ability to claim capital allowances.
The client makes fixed monthly payments over the life of the agreement with an initial fee usually equivalent to three month’s rental up front and at the end of the contracted period have the opportunity to buy the vehicle by paying a final pre-determined balloon payment, legally transferring ownership to them. Although this method protects the client from the risk of depreciation they will still be exposed to the risks of maintaining and disposing of vehicles.
This is a vatable method of financing a vehicle traditionally used by VAT registered companies. It allows many of the benefits available from Contract Hire whilst the responsibility of the disposal of the vehicle at the end of the lease period remains with you.
A Finance Lease can be structured in two ways; you can either choose to pay the entire cost over the agreed lease period plus interest charges or you can pay lower monthly payments with a deferred ‘Balloon’ payment at the end of the agreed term.
As a form of lease, ownership of the vehicle remains with the supplier, however any surplus proceeds from the sale of the vehicle goes to the client.
This is a method of financing a vehicle, normally for VAT registered companies, which allows a business to acquire ownership of the vehicle at the end of the contract agreement once the ‘option to purchase’ final payment has been made. The monthly rental is determined by the cost of the vehicle, the agreement period and the estimated future value of the vehicle, which is based on the proposed annual mileage.
Lease purchase is a cheaper monthly alternative to hire purchase, the more traditional method of financing and is written on a hire purchase agreement with the same protections afforded by the Consumer Credit Act.
Sale and Leaseback
This method is suitable for companies looking to generate capital from the sale of their vehicles whilst retaining their use. Your vehicles are purchased at an agreed realistic market value and are then leased back to you through a funding method of your choice, this is also VAT beneficial.
This option operates in the same way as traditional contract hire, but as the name would suggest, these offer contracts for shorter periods. This method is especially suitable for companies with staff on short term contracts or when vehicle requirements fluctuate.
FOR PRIVATE AND BUSINESS
This is the traditional way of owning a vehicle by making monthly repayments and usually you will need to pay an initial deposit. Monthly repayments are made for an agreed time and after the final repayment the car is legally yours. Until such time it legally belongs to the finance company.
There are two main types of hire purchase scheme:
Fixed interest hire purchase: monthly repayments remain fixed throughout.
Variable rate hire purchase: monthly repayments increase when interest rates rise and decrease when interest rates fall.
Personal Contract Purchase
This method is highly attractive and becoming increasingly popular, combining fixed low monthly payments with flexibility at the end of the agreement, allowing you to either buy the vehicle (by paying an agreed minimum residual value), part exchange it for another vehicle, sell it privately (settling the balloon payment) or subject to mileage and condition return the vehicle with nothing more to pay.
Personal Contract Purchase is also ideal if you are opting out of a company car scheme. You can use your company car allowance to fund your monthly payments without paying company car tax. This option allows the employee or individual to benefit from industry discounts, resulting in lower monthly payments so you can choose a higher specification vehicle.
Personal Contract Hire
This is designed for people who don’t want the hassle of ownership or the expense of short term rental. It delivers all of the benefits of a company car to private purchasers at a fixed monthly rental over an agreed term. At the end of the contract term the vehicle is returned to the finance company with nothing further to pay (provided that contract mileage has not been exceeded) taking away the problem of selling privately and the worry of depreciation.
As you will see there are a wide range of tailor made options open to you and if we go right back to the question that is posed at the beginning of this article, I’m afraid it is impossible to give you a definitive answer. It really does depend on your individual circumstances and indeed your own preference.
As outlined here, there is no clear cut rule as to which option is best, as there are benefits and drawbacks to both leasing and buying but what is interesting is that there are now options such as Lease Purchase or Personal Contract Purchase available which give you the best of both worlds.