What is Contract Hire

When people talk about leasing a car, they generally tend to be talking about contract hire. This is because contract hire is one of the most common and popular lease agreements.

But, what is it?

Unsurprisingly, contract hire is also one of our most popular lease agreements. So, we’re going to talk you through what contract hire is, who it’s for, and the pros and cons of each.

What is contract hire?

Firstly, what is contract hire?

Contract hire is designed for businesses. There is one for private individuals which is aptly named private contract hire.

However, contract hire is essentially where a company rents a car for between 2 and 5 years while paying a monthly rental. After that time is up, they hand the car back.

Who is contract hire for?

Contract hire is perfect for businesses who want to hand the car back at the end of the agreement.

There are also VAT benefits to business contract hire, but we’ll talk about those in a minute.

So contract hire is also perfect for VAT registered businesses.

What are the pros and cons of contract hire?

So, why should you choose contract hire?

Some of the advantages of contract hire are;

• You don’t have to worry about the disposal of the vehicle
  • When the contract is up, you hand it back. This means you don’t have to worry about depreciation.

• You don’t have to worry about negative equity
  • As you won’t be paying the full amount of the vehicle, you don’t have to worry about the negative equity.

• The monthly payments stay the same
  • This makes it easier to budget for the payments

• Road tax is included
  • It’s one less thing to worry about!

So, there are quite a few reasons why contract hire is perfect for you. But, what about the disadvantages?

• You don’t own the vehicle
• You are subject to condition and mileage restrictions
  • You have to stick within a pre-agreed mileage. If you don’t, then you will be charged an excess mileage fee. You can read about excess mileage here.
  • You will also have to keep the car in good condition. Not that you wouldn’t, of course, but it means contract hire is not suited to those suffering more than fair wear and tear. For that, you should look at a finance lease.

• You have to service the car throughout
  • While it’s not a major thing, it’s an extra cost to think about. You can read about servicing costs here.

How much is a contract hire?

We’ve weighed up the pros and cons, now let’s look at price.

We can’t actually tell you how much a contract hire will cost because the cost varies from contract to contract. However, we can tell you how it’s calculated.

Generally, the rental is determined by the residual value of the car at the end of the contract, and the purchase price of the vehicle.  

So you are essentially paying for the depreciation. The more the car holds its value, and the greater the discount, the lower the monthly rentals.

This is why cars such as Mercedes and Audi are so popular to lease- because they hold their value and are therefore a reasonable price.

There are factors that affect lease price however, and one of the biggest ones is mileage. The more miles you do, the quicker the car depreciates and the less they can sell it on for.

The general calculation for this is;

(retail price – estimated residual value)/months on contract + admin fees = monthly payments

When you choose a contract hire, there are some other things to consider. For example;

• Company car tax
• GAP insurance
• Maintenance package

Will I have to pay company car tax?

There is a chance that you will have to pay company car tax, yes.

You will have to pay company car tax if you use your company car for personal use. This includes travelling to and from work.

You do not have to pay company car tax, however, if you are a partner or a partnership or a member of a limited liability partnership (LLP), or if you are the proprietor of your own business. A director of a limited company still has to pay company car tax.

The amount of company car tax you pay is dependent on the type of car and the P11d value. The amount you pay monthly is calculated by your income and what tax bracket you’re in.

We’ve only touched very briefly upon company car tax. But you can read our comprehensive guide to company car tax here.

What is GAP insurance?

GAP, or guaranteed asset protection insurance, is something else you need to consider when getting into a contract hire agreement.

In the event of a write off, GAP insurance covers the difference between the insurance company pay out, and what the finance company asks for to cover their loss.

This means you won’t be in a negative equity situation.

For more information, you can read our comprehensive guide to GAP insurance here.

What is a maintenance package?

One of the extra costs when it comes to contract hire is servicing your car. However, you can spread out this cost by getting a maintenance package. This is an extra fee each month that covers the servicing costs. This is for the entirety of your lease contract. The cost depends on the length of the contract and your annual mileage. You can read more about maintenance agreements here.

Hopefully this has cleared a few things up about contract hire. It’s perfect for businesses who do not want to worry about disposing of the vehicle and like the idea of handing the car back. However, you do have to think about things such as GAP insurance and company car tax.