Car and Auto Blog

Contract Hire Explained

Car leasing, personal contract purchase, contract hire, lease purchase and car loans are all different ways to finance the cost of cars and vans. The variety of vehicle financing options available today can be confusing so I thought I would focus on ‘contract hire’ and explain how this technique works.

Leasing a car basically takes care of one of the biggest financial issues associated with acquiring a new vehicle which is depreciation. The value of your brand new car falls through the floor, even before you have driven away from your supplier.

When you take out a car lease the residual value of your selected vehicle is calculated. The is the estimated value of the vehicle at the end of the agreed lease period based on the anticipated mileage during this time. The calculated residual value of your chosen vehicle is then deducted from either the current manufacturers retail price, or a value agreed with the leasing firm, and you will pay the remainder through your monthly lease payments. So the higher the residual value in comparison with the current value, the less you will be paying each month.

Contract hire is a vehicle financing method that has maximum benefit for customers who are registered for VAT, so it is most suitable for businesses and the self-employed. If your vehicle is used exclusively for business purposes you can reclaim 100% of the VAT. Even if your car or van is used for some personal use you can still reclaim 50% of the VAT.

A contract hire agreement means that you have actually hired the selected car or van for an agreed period, usually between 1 and 5 years, during which time you will pay the agreed rental, based upon mileage. You will return the vehicle to your supplier at the end of your contract hire period, much the same as a car leasing contract. You will not encounter any painful surprise disposal or depreciation costs.

Contract hire can optionally include full vehicle maintenance which may include routine servicing and replacement tyres. Up to 100% of your contract hire rental charges can be offset against your taxable profits and minimal capital outlay is required.

It’s therefore no surprise that contract hire is the favoured financing option chosen by many businesses and self-employed people.

For cheap car leasing I recommend Nationwide Vehicle Contracts.