What is Contract Purchase (CP)?
Business Contract Purchase Explained
Contract purchase (CP) is primarily for businesses, although there is a personal contract purchase option.
In simple terms, the company pays monthly payments throughout the contract and at the end of the purchase agreement, you’ll have the option to either sell, buy or give back the vehicle. Generally, CP agreements will last from 2 to 4 years, depending on the companies preference and budget.
A purchase contract is great for companies who want to own their own vehicle, but also want to avoid the risk of depreciation.
The Pros of CP
- You have the option to buy the car at the end
- The price to buy is pre-agreed at the start of the contract (the balloon payment), so you can budget for it in advanced
- Affordable monthly payments due to the balloon at the end
- The car can be depreciated into the business accounts, enabling tax efficiences
- You have the option to part exchange the car once the finance has been cleared
- Anything made above the final finance payments is yours to keep
- It’s easier to settle the contract early in comparison
- You’ve got flexibility in what you want to do at the end – it doesn’t have to be decided till one month before (normally).
The Cons of CP
- The monthly payments tend to be more expensive than on a Contract Hire
- The interest rate is slightly higher than a Hire Purchase agreement
- You’re responsible for taxing the car every year
- The whole cost of the vehicle is shown on your credit file which could affect your credit score
- You’re still subject to mileage and condition (fair wear and tear), especially if you’re planning on handing the car back
How is CP price determined?
The price over the contract is affected by a number of factors, namely what you decide to do at the end.
At the start of the contract, a balloon payment will be set. This is basically how much the car should be worth at the end of the term, also known as a guaranteed residual value.
This balloon payment is then deducted from the price of the car, and the rest of the cost is split into however many months you take the contract out for and the expected depreciation of the amount of miles you’d be doing.
On top of this, additional costs come in with maintenance packages, insurance and car tax (first year is free!).
The overall cost of the monthly payments come from;
- The cost of the vehicle
- The length of the contract
- The mileage done throughout the contract and therefore;
- The residual value agreed
- Additional extras such as maintenance packages
At the end of the agreement, once every monthly payment is made, you’ll have the option to buy the car with the final balloon payment, hand it back with nothing else to pay OR sell the car to a 3rd party and use the money to pay off the balloon payment (anything you make above the balloon payment, you get to keep).