What are the pros and cons of car leasing?
In the US, one in four new cars is personally leased in some way. Now, car leasing is growing increasingly popular in the UK. In fact, last year leasing brokers’ combined car and van volumes grew by 27% over the course of 2015 (bvrla.co.uk).
If you are thinking about leasing a car, it’s important to weigh up the pros and cons to make sure that car leasing is the right option for you. After all, it’s not going to be right for everyone. However, we understand that there is a lot of information to take in when looking into leasing a car, which is why we’ve written an article on the advantages and disadvantages of leasing a car.
It should be noted that the pros and cons on this list are subjective, so while something may be a con to some, it could be a pro for others.
Personal Contract Hire vs. Business Contract Hire vs. Finance Lease
Firstly, let’s explain the differences between Personal Contract Hire, Business Contract Hire and Finance Lease.
Personal Contract Hire
Personal contract hire, or private contract hire, is a hugely popular way of leasing a car. It’s perfect for those who want to change their car every few years. The customer will rent a car for 1 to 5 years and will pay a fixed amount every month until the contract is up. Once the contract ends, the car gets handed back and they can get a brand new car.
Business Contract Hire
A business contract hire is pretty much the same as personal, except it’s for business instead of personal use. The company will have a car (or cars) for 1 to 5 years paying a fixed monthly payment. There are also VAT benefits that come with business contract hire, but we’ll get to that later.
A finance lease is also for businesses. However, it’s perfect for those whose company cars will be doing extremely high mileage or will suffer more than fair wear and tear. You are also responsible for selling the vehicle at the end of the lease, but there’s more on that later.
What are the Pros and Cons of Contract Hire?
Contract Hire is essentially where you have a car for a few years and, when that contract is up, you hand it back and get a brand new one. It’s pretty straightforward.
However, there are advantages and disadvantages to Contract Hire, and you should keep these in mind instead of just choosing the ‘popular option’.
What are the Pros of Personal Contract Hire?
- Fixed motoring cost: The cost of your contract hire is fixed for the entirety of the contract. This usually includes road tax (but not always) and can also include maintenance (again, not always).
- Easy delivery and disposal: Generally speaking, the car will be dropped off at your door and collected from your door when it comes to the end of the contract. This saves you the hassle of having to dispose of the vehicle, especially if you had to sell it.
- You can access fleet discounts: If you’re leasing a car you can access fleet discounts that are not normally available to private individuals.
- Road Tax is included: Pretty self-explanatory, the car tax is included in your lease agreement.
- You get a new car every few years: This is probably the most attractive part of contract hire. Every few years you get a shiny new car without having to go through the trouble of selling your old one.
- You don’t have to worry about depreciation: Because you aren’t selling your car, you won’t have to worry about the depreciation of the vehicle. Which is really convenient.
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What are the Pros of Business Contract Hire?
- Tax benefits: If you are leasing the car through a VAT registered company you can claim 50% of your VAT back on the payments, and 100% of the VAT on a maintenance agreement.
- Frees up cash: By leasing your cars you won’t have your cash tied up in a depreciating asset.
- It’s good for business: New cars not only make employees feel valued but they’re also great for company image.
- Better accounting solution: the finance commitments are “off balance sheet”. Therefore, the liability of the finance is not shown on the company accounts, which can be an attractive trait for many companies.
What are the Cons of a Contract Hire?
The cons of Contract Hire are essentially the same for both personal and business use, however, the cons depend greatly on your point of view.
- You don’t own the vehicle: Although the car will be driven by you and you will share some fond memories with it, the car isn’t actually yours. You can read our article on whether you can buy your vehicle at the end of a lease agreement here.
- Limited mileage: At the start of your contract hire you will agree to set amount of miles a year. However, there is a chance you will go over this limit and be subject to excess mileage charges. You can find out more about what happens when you go over your excess mileage here.
- Car condition: You will also have to keep the car in good condition, which we’re sure you would anyway, but this is something to keep in mind. A good vehicle broker will supply you with the BVRLA Wear and Tear Guide, so you know exactly what constitutes as fair wear and tear. If there are any damages excess of fair wear and tear, however, you need to get them fixed before you return the car. If you don’t, you could incur charges.
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What are the Pros and Cons of a Finance Lease?
A Finance Lease is ideal for businesses whose vehicles:
- Suffer more than their fair share of wear and tear.
- Are expensive conversions.
- Do incredibly high mileage (over 50,000 miles a year).
But, while Finance Lease certainly has its strong points, it also has its weaknesses.
What are the Pros of a Finance Lease?
- Low initial outlay: If you wish, you can make the initial payment low. This will increase the cost of the monthly payments or at the final balloon payment, however, but it’s something you can consider.
- It’s flexible: Most leasing companies will offer you a number of payment options to suit your own cash flow.
- Tax benefits: If you are leasing the car through a VAT registered company you can claim 50% of your VAT back on the payments.
- Accounting solutions: A finance lease option allows you to feature the vehicle as an asset on your balance sheet (more information needed)
- Sales proceeds: At the end of the lease agreement you are responsible for selling the vehicle on. The money from the sale will go towards the final balloon payment of the car. If you sell it for more than that payment, you keep the extra.
- You don’t have to worry about wear and tear: Unlike contract hire, you don’t have to worry about facing extra charges if there’s damage to your vehicle. However, keeping it in good condition is in your financial interest, as you’ll be the one trying to sell it on at the end.
What are the Cons of a Finance Lease?
- You don’t own the car: At the end of the contract, you are responsible for selling the vehicle, which you must sell to a third party. However, if that third party decides to sell it back to you, that’s your business.
- Operating cost: Unlike Contract Hire, you have to pay the road tax.