One of the most important things about business leasing is deciding which leasing option to go through.
We get asked about the differences between contract hire and contract purchase quite a bit. And it’s easy to see why, they are quite similar. However, there are some major differences that could be the decider in which is the best option for you.
So, in this article, we’ll be looking at the main differences between the two, and the pros and cons of each. It should be noted here that this article is aimed at business lease, if you want to look at the differences between personal contract hire and personal contract purchase then you can head to our article here.
What is contract hire?
When people talk about leasing, they generally mean contract hire. It’s one of the most popular and common lease agreements.
Contract hire is perfect businesses who want to hand the car back at the end of the agreement. A business will have a car for between 1 and 5 years all the while paying a monthly rental. After that time is up, the car is handed back. It’s pretty simple
What are the benefits of contract hire?
Some of the benefits of contract hire are;
- You don’t have to worry about disposing of the car
- At the end of the agreement, you just hand it back.
- The monthly payments are fixed
- This makes for easy budgeting
- Road tax is included
- You can get a nicer car for less money
- This is because cars on contract hire tend to be cheaper than other lease contracts.
- So, you can get a nicer car for less than you would on a different contract.
- VAT registered businesses can offset 50% of the VAT on a car (100% for a van)
- We’ll go into this in more detail a bit later
- The finance commitments are “off balance sheet”
What are the disadvantages to contract hire?
However, there are disadvantages. For example;
- You won’t own the vehicle
- This is pretty subjective. Some people like the idea of owning at the end, some do not.
- You are subject to mileage and condition restrictions
- You have to stick to a pre-agreed mileage. If you go over this, you can incur charges
- You also have to keep it in good condition. This has to be in line with the BVRLA fair wear and tear guidelines. If you don’t, you could face charges.
- If you your vehicle is going to be doing excessive mileage or it might be suffering from more than fair wear and tear, you should consider a finance lease.
- You have to service the car throughout the agreement
- Not a major thing, but a factor you should take into account.
What is contract purchase?
A contract purchase is similar to a contract hire in the sense that your business will pay monthly payments for a set period of time.
The difference between contract hire and contract purchase is what happens at the end. At the end of a contract purchase contract you have three options;
- Buy the car for a pre-agreed amount
- Hand the car back
- Subject to mileage and condition of course
- Part exchange the car and use any equity to go towards the deposit of your next one
So it’s a little more flexible than contract hire.
What are the benefits of contract purchase?
Some of the advantages of contract purchase are;
- It’s flexible
- The purchase price is pre-agreed at the beginning of the contract
- So should you want to buy the car, you can budget accordingly
- The car can be depreciated into the business accounts
- The company can offset finance interest charges against corporation tax
- It’s an asset to the business – which will help towards a company’s balance sheet
What are the disadvantages of contract purchase?
However, contract purchase isn’t for every business. Some of the disadvantages are;
- The monthly payments tend to be higher than on a contract hire
- Sometimes, the interest rate is marginally higher than a hire purchase
- The whole cost of the vehicle is shown on your credit file
- You are still subject to mileage and condition restrictions
- You are responsible for taxing the car
Contract hire vs. contract purchase; which is best?
So we’ve gone through the two agreements and you want to know which one is best.
There isn’t really a set answer to this question. It depends entirely on what you want out of your business contract. You may want to hand the car back with nothing else to pay and be done with it, or you may want some flexibility in your agreement.
There are always great deals on both business options, so which one is best is pretty much down to personal preference.
What are the benefits to leasing through business?
You may have noticed, either by common knowledge or through your extensive research, that there appear to be quite a few benefits to business leasing.
When you lease through a business you do have advantages that private individuals do not. Some of these include;
- Tax benefits
- If you are leasing through a VAT registered company then you can claim 50% VAT back on the monthly rentals. You can claim 100% back on a van.
- The only exception is if you use the vehicle for personal use. If you do, then you can claim the monthly cost of the lease against profits.
- How much of this varies on the emissions. If your vehicle emits more than 160g/km then you can only claim 85% back. Any less, you can claim back 100%
- Your cash isn’t tied up in a depreciating asset
- It’s a better accounting solution
- Finance commitments can be “off balance sheet”
- So, the liability of the finance doesn’t appear on the company accounts
These benefits don’t apply to all business lease options, but they are benefits not available to private individuals. For more information, you can read our article on business benefits to leasing.
Hopefully, this has given you a better insight into what both contract hire and contract purchase are, and whether they are right for you.