How is Contract Hire price calculated?

When it comes to leasing, there is not a ‘one size fits all’ approach to pricing. There are many different things that affect lease price and it’s important that you know how lease prices are calculated before you decide which deal is right for you.

In this article, we’re going to tackle how the price of contract hire is calculated, and what affects lease price.

How is the price of a contract hire calculated?

Contract hire is one of the most popular lease agreements, and is perfect for businesses. There is a contract hire for private individuals, imaginatively named personal contract hire.

A price of a business contract hire is determined on;

  • Residual value
  • Purchase price
  • Length of the contract
  • Annual mileage
  • Your credit score
people at a dealership discussing new car purchase

The residual value is how much the car is  expected to be worth at the end of the contract. Everything else is pretty self-explanatory. However, there are some things that affect the purchase price of the car, which is what we are going to talk about in this article.

What affects purchase price?

how is the price of a contract hire calculated

There will be manufacturers who are behind on targets or want extra volume and will offer brokers or leasing companies extra discount. This reduces purchase price, which means that the difference between the purchase price and the residual value will have changed. In turn, this will affect your monthly payments.

So, you could have a Jaguar and an Audi, both worth £40,000. Many will think that these cost the same amount in monthly payments, but actually the price could be vastly different. Jaguar and Land Rover are currently having a great time in the market and therefore don’t need to discount their products as much. They still do, of course, but not by very much.  

However, Mercedes, Audi and BMW are constantly competing with each other across a majority of their ranges. This means that they offer extremely competitive discounts. So this lowers the purchase price which closes the gap between the purchase price and the residual value, making your monthly payments lower.

The purchase price of the car is not declared on the finance documents, which means that you, the customer, will never know how much discount has been offered.

As a general rule, to make things less complicated, the calculation for price of a contract hire is as follows;

(purchase price – estimated residual value)/months on contract + annual mileage + admin fee = monthly payments

So from this, you can understand why BMW’s, Audi’s and Mercedes’ are so popular to lease.

What affects lease price?

We’ve gone through how the price of contract hire is calculated, but what affects lease price in general? There are some universal factors that affect all lease agreements, and these include;

  • The type of car
    • Make, model, specification and engine
  • Length of contract
  • Your annual mileage
  • Choice of supplier
  • Credit rating
  • The type of lease contract
  • Residual value
  • Manufacturer’s targets
  • Any additional features
how is the price of a contract hire calculated

So, while there are specific ways in which the price of a contract hire is calculated, there are also various external factors that will affect the price of a lease contract, regardless of the agreement.

contract hire vs contract purchase
want to know more about contract hire? download our guide here

Andrew Kirkley

Director at OSV Ltd
Andrew enjoys: Movies and travelling to new cities to explore different cultures.

Andrew has been in the motor trade for over 20 years. What he enjoys most about his job is the team spirit and the dedication of his work colleagues. He also appreciates the teams input in the improvement of the company.
Andrew Kirkley

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  • 15th November 2016

2 Comments

  • Nawaaz| 17th March 2019 at 8:00 am Reply

    Does a PCH monthly price include any interest? I am not finding conclusive answers online. Thank you

    • Rachel Richardson| 19th March 2019 at 1:56 pm Reply

      Hi Nawaaz,
      As it is a rental agreement rather than a purchase scheme there is no interest on the agreement. I hope that this helps you. If you are searching for a car and would like some guidance please get in touch and someone on our team will be able to help.

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