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Car finance

Need-to-know guide to car finance

With so many options available, sometimes it's hard to know how to finance your new car. We explore some ways to establish what all these terms mean.

Contract Hire

Contract Hire is a great option for companies who emphasise cost control. One regular and VAT- efficient payment will cover most motoring costs and risks, including the Road Fund Licence, depreciation and the eventual disposal of the vehicle. Many clients also choose to include a maintenance package that's designed to suit them. The only other costs remaining with the customer are fully comprehensive insurance & fuel.

What are the main features of contract hire:

  • Gain an additional credit line
  • Reclaim VAT on 50% of payments and on 100% of maintenance package costs
  • Run vehicles that are not recorded on the balance sheet but on the notes to the audited accounts
  • Claim hire rental tax allowances

Some benefits of contract hire include:

  • Fixed cost, inflation free motoring
  • No residual value risk
  • Low initial upfront costs
  • Cash flow benefits for business users
  • Ability to renew cars for minimal outlay
  • Keep your fleet up to date

Personal Contract Hire

Personal Contract Hire, as its name suggests, is essentially the same, and offers the same benefits as Contract Hire, but for private individuals. If you want fixed cost motoring, or have opted out of a company car scheme then Personal Contract Hire could provide you with hassle free motoring without the residual value risks associated with traditional ownership.

VAT is built into the monthly payments, but is not reclaimable by private individuals. Maintenance packages are usually available so that you don't get any nasty surprises.

Some benefits of personal contract hire include:

  • Hire new or used vehicles
  • Usually includes a full-term road fund licence
  • Worry free motoring when including maintenance

Personal Contract Purchase

Personal Contract Purchase (PCP) suits people who want to own the vehicle at the end of the contract and who value expense control. It is an excellent option for those who have opted out of a company car scheme or for non-VAT registered companies. This is a variation on lease purchase where the 'balloon' or deferred payment is agreed and guaranteed.

Some benefits of personal contract purchase include:

  • A low deposit
  • Payments that can be reduced by a deferred 'balloon' payment
  • An option to own the vehicle at the end of the contract
  • No disposal or unexpected 'balloon' payment risks
  • The option to refinance the balloon payment at the end of the contract

No Deposit Car Leasing

No deposit car leasing, as its name suggests, offers a leasing option which reduces the initial rental needed. The main drawback is that usually monthly rental rates are far higher.

Contract Purchase

Ideal for companies who cannot fully reclaim VAT and is particularly suitable for financing the more expensive cars on the fleet, typically those costing more than £25,000

The big difference between Contract Purchase and Contract Hire is that there is the opportunity to buy the vehicle at the end of the contract period. You have the option of paying a 'balloon payment' at the end of the contract which makes you the legal owner or alternatively you can return the vehicle to the funder.

Contract Purchase offers all the operational, managerial and administrative benefits of Contract Hire, together with the tax-efficient benefits of ownership, such as the ability to claim capital allowances.

Finance Lease

Finance Leasing is a fixed-term funding option for companies who want to administer their own vehicles and who want to show these as an asset on their balance sheet. Companies choose from 2 options:

  1. To pay for the entire cost of the vehicle and the interest over the agreed lease period, or
  2. To make lower monthly payments by electing to make a deferred - or 'balloon payment' at the end of the agreement.

Whichever is chosen, clients never take ownership of a Finance Leased vehicle. It must be sold to a third party and a portion of the sale's proceeds, together with any 'balloon payment' must be paid to the finance company.

Some benefits of finance leasing include:

  • Gain a further credit line
  • Combine a low initial outlay with low monthly costs
  • Reclaim 50% of the VAT on repayments and claim hire rental tax allowances
  • Show another asset on your balance sheet and equity in vehicle sale proceeds

Read more about car leasing