As a small business, when looking for your new car, your first car finance decision has got to be “do you want to own the vehicle?”
Many of the new car dealer finance schemes are structured around a Personal Contract Purchase (PCP) finance product, which does enable you to finally own the vehicle after all payments have been made. You pay your deposit, then pay an agreed number of monthly payments for the term, then you have the option of paying the GMFV (Guaranteed Minimum Future Value) and the car is yours. It is a really simple way of buying a car.
This final payment option also gives you the opportunity, if you prefer, to just return the vehicle if you don’t want to pay the final amount. Provided you have not exceeded the mileage limit allowed and the condition of the vehicle is in a fair wear and tear condition, there is usually nothing more to pay.
PCP schemes are similar to car leasing in this way, if you never intend to pay the final payment and you don’t want to own the vehicle. If all you are looking for is to pay the least cash for the period- say three years, you can compare the total payments made on both these products, to see which suits you best. Cars will depreciate in value and the costs may not be as straight forward as they seem, so here are some guidelines on comparing PCP dealer car finance to business car leasing (contract hire);
Dealer PCP finance – the general scheme structure -(may vary by manufacturer)
- A deposit is usually required.
- Then add the total number of payments to follow.
- Total the initial deposit and the total number of payments together and see what this figure comes too.
- The dealer will specify the contract agreement for you at the outset i.e. normally three years at 10,000 miles (always check what the contractual mileage will be and confirm if maintenance cover is included). In most cases you normally have to pay for the maintenance yourself, so do ask if this is an extra cost, or if it is included in the payments you are making.
- Remember on a PCP -if you want to own the vehicle, the optional GMFV is the payment you have to make to finally gain title of the vehicle.
Once you have established this you will then know what you have will to pay for the three year PCP contract.
When looking at a car leasing rental plan for the same car (or contract hire leasing as it is sometimes called), on a three year term, at 10,000 miles per annum, non maintained contract hire, the payment structure would normally be as follows;
Car leasing (contract hire) leasing) plan
- Initial rental is usually three months in advance (check this as some companies may charge six rentals to make the monthly payments seem lower).
- Thereafter on a three year contract, your next payment starts in month two and you will pay 35 subsequent payments i.e. 38 payments in total.
- Your total rental payments therefore should normally be 38 times the £ monthly rental.
- At the end of the contract hire period you just send the car back and then order a new one.
- Please note car leasing (contract hire) is fixed to an annual mileage for contract period and if you go over this allowance there will be a charge. This is usually the same arrangement for a car dealer PCP finance scheme as well i.e. possible excess mileage charges and fair wear and tear.
- VAT treatment – if you are a private customer, you need to make sure the VAT has been added to any car leasing rental quoted to you (currently VAT is levied at 15%). Some companies advertise personal car leasing prices without the VAT, which can be misleading.
- If you are a normal VAT registered business, then there is currently a 50% recovery restriction on the finance rental so if you are looking at prices without VAT, add 7.5% (half of the full 15%) to find out the true cost to your business. This is sometimes called the “effective rental”.
- If you are a sole trader and are not VAT registered then you have to add the full VAT charge at 15%.
The comparison
Now you have got the two total figures for the car dealer PCP finance scheme and the car leasing rentals you can compare the difference.
A couple of final things to consider -the CO2g/km emissions figure is important, if you want to get the best tax relief on your vehicle, so it is probably best to look at cars with a CO2 figure of less than 160g/km if you are running a business, whether you buy or lease.
Finally before making any final decision it would make sense to speak with your own accountant, to just make sure the finance package you have chosen is right for your business.
Useful checklist (payments for PCP, rentals for Car Leasing)
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Product
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PCP – Car Dealer
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Car Leasing
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Terms – Non Maintenance
3 years @10,000 MPA?
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Initial deposit/rental?
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X
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3 X
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How many more payments/rentals?
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35 X
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Total paid over contract for each product?
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£
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£
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