Everything you need to know about Business Contract Purchase
BUSINESS CONTRACT PURCHASE EXPLAINED
So, you’re a business owner and you’d like to lease a car for 2 to 4 years through your company? Contract Purchase could be the ideal solution for you. If you’re looking to get a Contract Purchase agreement as an individual there is a personal contract purchase option available.
In simple terms, the company makes monthly payments throughout the contract and at the end of the agreement, you’ll have the option to sell, buy or give back the vehicle. Generally, CP agreements will last for 2 to 4 years, depending on the company’s preference and budget.
Contract Purchase is great for you if your company wants to own their own vehicles, but also want to avoid the risk of depreciation.
THE PROS OF CONTRACT PURCHASE
- At the end of the agreement you have the option to buy the vehicle
- The price to buy is pre-agreed at the start of the contract (the balloon payment), so you can budget for it in advance
- Affordable monthly payments due to the balloon at the end
- The car can be depreciated into the business accounts, enabling tax efficiencies
- Once the finance has been cleared you have the option to part exchange the vehicle
- Any money made above the final finance payment is yours to keep
- At the end of the agreement there is flexibility, you can sell, buy or return and you don’t have to decide until one month before the agreement finishes (normally)
THE CONS OF CONTRACT PURCHASE
- The monthly payments tend to be more expensive than if you choose Contract Hire
- The interest rate is slightly higher than with 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 vehicle condition (fair wear and tear), especially if you’re planning on handing the car back
HOW IS A CONTRACT PURCHASE PRICE DETERMINED?
The price of the contract is affected by a number of factors, including what you decide to do at the end.
At the start of the contract, a sum will be set for the balloon payment. This is basically how much the car should be worth at the end of the term, also known as the guaranteed residual value.
This balloon payment is then deducted from the price of the car, and the amount left is split into however many months you have decided to take the contract out for and the expected depreciation of the amount of miles you’ll be doing.
On top of this are the additional costs such as maintenance packages, insurance and car tax (first year is free!).
The monthly payments are calculated by looking at the following:
- 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.
Once every monthly payment has been made you’ll have three options:
- You can buy the car by making the balloon payment
- You can hand the car back with nothing further to pay
- You can sell the car to a 3rd party and use the money you receive to pay off the balloon payment – anything you make above the balloon payment is yours.