Contract Hire explained: what is it, finance example, what happens at the end of the contract?
Contract Hire: What Is It?
Contract Hire provides a business with a vehicle for a specified period. Terms vary between providers so each plan has to be considered on merit - but there are trends. The vehicle can be either new or second-hand and hired over 24 to 60 months. There is a mileage limit that rarely exceeds 150,000. It is paid for via fixed monthly instalments that make is easy to predict expenditure, plus a deposit. Payments – often for an additional fee – include servicing and maintenance. Excise Duty might be covered too (road tax). A customer might also be able to claim back 100% of any VAT.
Contract Hire: How Do The Payments Work?
The finance provider establishes the vehicle's current value. Let us say £10,000. The customer then chooses to hire over (say) 36 months and sets a mileage limit of 30,000. The provider calculates that the vehicle will be worth £4,000 when it is returned. That £6,000 difference is the critical factor. It is, in essence, this depreciation the customer pays throughout the contract. It is paid courtesy of a deposit and fixed monthly instalments. The deposit typically equals 3 instalments. Naturally, the cost to the business varies based on its requirements. Increasing the mileage limit ensures the vehicle will be worth less at the end of the plan, for example. This has to be recovered via the monthly payments/deposit.
Contract Hire: What Happens At The End Of The Term?
At the end of the contract the vehicle has to be returned. The supplier cannot refuse. Disposal should, therefore, be straightforward as there is no need to sell or trade-in. But there is more to consider than handing back the key. The vehicle has to be presented in reasonable condition for age and mileage. What defines reasonable should be explained by the provider before the customer signs the dotted line. There is an allowance for wear and tear, of course. However, if the vehicle is below standard – perhaps due to a large dent on its bumper - the customer pays for the repair. Such terms encourage the user to treat it properly. There is mileage to consider too. If the vehicle has exceeded its limit there is a fee. The cost is typically several pence per-mile.
Contract Hire: Additional Notes
- Contract Hire is commonly refereed to as leasing.
- The customer typically has to arrange motor insurance.
- If the VAT rate changes the monthly payments will too.
- Contract Hire might enable a customer to drive a newer, or more prestigious, vehicle than is otherwise affordable.