Finance
- Hire Purchase
- Contract Purchase
- Contract Hire
- Personal Contract
- Finance Lease
- Lease Purchase
- Employee Contract Purchase
- Benefits of Contract Hire
Guide to Types of Vehicle Funding
More and more companies and private individuals are choosing to acquire vehicles through some form of funding agreement rather than buying them outright. In most cases either ownership or leasing is available. Both forms of funding usually involve paying a regular amount over a contracted period, typically three years in most cases.
Purchase-based funding methods include hire purchase and contract purchase. Lease-based methods include contract hire and finance lease.
Before opting for a funding method, customers should consider the overall cost of each approach, the flexibility it provides and in the case of business customers, how it will affect the balance sheet and what the potential tax implications are.
The links on this page provide descriptions of the various funding methods available. Please feel free to contact one of our friendly customer sales advisors on 0844 745 1818 for more information.
Hire Purchase
This is a method of financing a purchase with the vehicle becoming the property of the lessee at the end of the period. The monthly payment is determined by the amount of deposit paid, the period of the contract and the sale price of the vehicle.
The loan is secured against the vehicle, which can be repossessed if payments are not kept up. In the event of the vehicle being sold before the end of the agreement you would still be required to pay the loan back in full. The vehicle appears on the balance sheet and the purchaser can claim a capital allowance for its depreciation as an asset.
The interest elements of the hire purchase fee can be offset against taxable profits.
Contract Purchase
The company agrees to buy the vehicle via a series of monthly instalments, covering the cost of the vehicle and an interest element. The monthly fee usually includes a charge for any additional services, such as maintenance. There is usually a final balloon payment, equal to the vehicle's residual value, after which legal ownership passes to the user.
Having gained legal ownership, the new owner can keep the vehicle, sell it on directly, or sell the car back to the finance company for a price agreed at the start of the contract.
Ownership of the vehicle for tax purposes passes to the user on the day the contract is signed, meaning that its cost can be written down on the balance sheet (by claiming capital allowances).
Contract Hire
Contract hire is the most popular way of hiring a business vehicle - more than half of all new company cars registered each year are funded this way. A vehicle is leased to an organisation for a set time and specified mileage, in return for an initial fee (usually three months rental) and a subsequent monthly charge. At the end of the contractual period, it is returned to the leasing company.
This type of hire removes many of the risks of vehicle ownership, including depreciation, servicing costs and eventual sale. The hirer benefits from the leasing company's greater buying power and knowledge of the used car market. However, they could also miss out on any potential benefits of car ownership, for example, lower than anticipated maintenance costs or an unexpected upturn in the residual value of a particular vehicle.
Because it is owned by the leasing company, a contract hire vehicle does not have to be shown as an asset on your balance sheet. Some or all of the rental charge can be offset against taxable profits.
Personal Contracts
Owning a car is an essential part of every day life for many people. But the use of a quality newer car for a fixed low monthly payment, has increasingly become a much more important consideration. With the ever increasing costs, high depreciation and running expenses often associated with ownership, it's now making more and more sense to evaluate the most affordable way to drive the car of your choice.
Many motorists are, like you, turning to a Personal Contract Purchase Plan (PCP) for their motoring needs. Simply because it offers them low monthly payments, plus flexibility to eventually own the car, hand it back, or to take out a new agreement on another vehicle.
PCP is a new flexible finance scheme that lets you drive a new, higher specification vehicle every 2 or 3 years, for a lower monthly payment than traditional finance plans. Aimed at helping people who want to drive a newer, quality car without over-committing themselves, PCP offers many benefits; just think of the lower maintenance and repair costs, plus greater reliability.
So, if you want a spacious estate for a couple of years, followed by a powerful saloon, then a rugged 4x4, PCP can make it possible.
Independence to choose
PCP is a purchase plan, which, unlike conventional car purchase, can offer a lot more flexibility and a lot more features:
- New and used cars
- Agreement period up to 3 years
- Lower deposits
- Lower monthly payments
- PCP - the options
The agreement is normally for 2 or 3 years and at the end of this you are given a choice.
Another car - Simply sell or part exchange the car against a newer one, making the final payment (GFV) through your dealer. If the part exchange price is greater than the Guaranteed Future Value, you can keep the difference, or put it towards a deposit it on your next car.
Or
Keep the car - pay off the Guaranteed Future Value and it's yours.
Or
Return the car to the funder - with nothing to pay*, so you won't have any worries about resale values, a benefit few other schemes on the market offer.
The Guaranteed Future Value - What is it?
The Guaranteed Future Value (GFV), calculated at the beginning of your agreement, is based on what the car's estimated value will be at the end of the plan, taking into account its future condition and mileage. This sum is guaranteed* no matter what option you decide to take at the end of the contract.
All funders aim to set GFV's at a level which should provide you with a surplus amount which can be used as a deposit on your next car, or if the car is returned, refunded to you - less sales expenses and commissions.
As you can see PCP can offer you the best of both worlds. Affordable monthly repayments with an ownership option and no worries about resale values.
*Subject to the mileage and condition terms.
Finance Lease
With a finance lease you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle. The user benefits with a fixed cost but does take on the administration and operating risks, for example unexpected maintenance, repairs and losses in residual value.
At the conclusion of the contract you can continue to operate the vehicle for a nominal fee, but you will at no time take ownership of the asset. Ownership of the vehicle remains with the leasing company for the duration of the contract, but the car does appear on your balance sheet with the capital element of the outstanding rentals representing a liability.
Some or all of the rental charge can be offset against taxable profits.
Lease Purchase
Our Lease Purchase Plan is similar to Hire Purchase but offers businesses greater flexibility.
Very simply, it provides all the advantages associated with Hire Purchase, including being able to claim writing down allowances and offset interest charges against tax, without having to fund the full cost of the vehicle straight away. In addition, by offering an array of rental patterns, our Lease Purchase Plan provides a far more flexible option than a more conventional hire purchase agreement. Yet, it still combines a low initial outlay with the option of ownership at the end of the contract, providing you with a chance to minimise the drain on your business's capital.
Monthly payments may be further reduced by the inclusion of a deferred final payment. Known as a 'balloon payment', this lump sum is based upon the estimated residual value of the motor vehicle at the end of the facility. The balloon payment, will be set at a level to reflect the use and anticipated mileage undertaken during the agreement. At Central Contracts we believe this is important in allowing you to have sufficient equity to put towards a deposit for your next vehicle.
At the end of the agreement you have a choice of either paying the lump sum and keeping the vehicle, or part exchanging it, using any remaining amount towards a deposit on a replacement vehicle.
Employee Contract Purchase
These schemes are designed as a staff benefit for organisations seeking an alternative to the traditional company car. They can also enable employers to set up an employee car scheme for people who do not qualify for a company car or allowance and allow employees to enjoy the benefits of company car ownership without paying company car tax.
They fall into two categories:
Personal Car Plans
The employee finances a vehicle for a contract period of their choice and can take an optional maintenance package and roadside assistance for peace of mind. At the end of the agreement the employee has three options; exchange the car for a new one, purchase the vehicle outright or return it without further cost.
PCP is ideal for employees that are opting out of a company car scheme. They can use their company car allowance to fund their monthly PCP payments without paying company car tax. It also allows them to benefit from fleet discounts and the suppliers' bulk purchasing power, resulting in lower monthly payments and the ability to choose a higher specification vehicle.
Employee Car Ownership Schemes
This type of scheme is very similar to a personal car plan, except that the employer retains control of the fleet policy, including buying terms, vehicle choice, replacement cycle, maintenance and insurance.
The company is protected because it knows the vehicles will be "fit for purpose" and well maintained, its costs are fixed and it no longer has the administration burden of a fleet of vehicles.
Benefits of Contract Hire
There are a number of varieties of leasing, but contract hire is the dominant type used in the UK. Here are the main business benefits:
1. Fixed monthly costs
Contract hire is a fixed-cost form of motoring. For a set monthly payment, you get the use of a vehicle for an agreed duration and mileage that suits your business. The fee takes into account the vehicle's price when hired, its forecast mileage during the contract and its estimated residual value at the end. As long as you have not exceeded the mileage and the vehicle is in a fair condition, you just return it at the end of the contract, with no further cost. For an extra monthly fee, you can ask your contract hire company to take care of nearly every hassle associated with car ownership, whether it is maintenance, servicing or replacement vehicles.
2. No risk
Most vehicles will lose value from the moment they leave the showroom. In a contract hire deal, you return it to the leasing company at the end of the contract period, and they take the residual value risk. If you include things like maintenance and servicing, you are also protected from any unseen rise in these costs.
3. Free up capital
Leasing a vehicle instead of purchasing it means you are not tying up capital in a rapidly depreciating asset. You can invest the money that you are not paying upfront in growing your business or reducing debts.
4. Claiming VAT
VAT is 100% reclaimable on the cost of a vehicle when it is solely used for business, regardless of whether you buy it or contract hire it. However, the situation is different if a vehicle is also used privately. While a contract hire customer can still reclaim 50% of the VAT charged on the finance cost of such a vehicle, the purchase can reclaim zero VAT. Another benefit is the fact that the leasing company that owns the contract hire vehicle can reclaim the VAT on it (because they are solely using it for business) and pass this on in the form of a reduced rental rate.
5. Off balance sheet funding
Vehicle leases do not have to be shown on a balance sheet, which will improve a company's liquidity ratio, gearing and return on assets.
6. Purchasing power
While your business may have a fleet of ten, fifty or even a few hundred vehicles, leasing companies are used to buying thousands each year. They can negotiate great deals with manufacturers and pass the savings on to you in the form of a very competitive leasing rate.
