Car Finance, Funding, Purchase and Leasing Methods
There are many methods of financing a car (purchasing, funding and leasing) to consider and it can get very confusing knowing the difference between the various types of car (or van) finance products.
We have shown the main ways of car finance, purchasing, funding or leasing (including contract hire below) to help you decide which is the right method for you, If you are a small to medium sized business, it is always best to speak to your accountant before you make a final decision on how to finance a car.
Hire Purchase (or Conditional Sale)
Hire purchase (also referred to as HP) is basically a hire agreement which gives you the option to purchase the vehicle at the end of the agreement. It is normally a fixed cost loan (and fixed period - usually 2 or 3 years) for money to purchase the goods (i.e. car or van), which is secured against the vehicle.
The finance company that provides the finance is known as the "creditor" and the business (or private individual) is known as the "hirer".
The finance company owns the asset until the end of the agreement when if all payments have been made, including the Option to Purchase fee, the title of the car or van is transferred to you.
Lease purchase
Lease purchase is essentially the same as hire purchase (HP) but the main difference is how the payments are structured. In other words the end payment can be higher to reduce the monthly payments throughout.
Leasing
A lease is different to a hire purchase agreement. It is an agreement between a leasing company (lessor) and a customer (lessee) that funds the use of the vehicle, but not the ownership of the vehicle. You are essentially renting the vehicle usage.
The leasing company will remain the owner (and registered keeper on the V5 log book) at all times and the customer has use of the vehicle, including properly maintaining it and also insuring the vehicle. But you never have the option to buy the vehicle outright as per other types of agreements.
There are many variations to a standard lease agreement including operating leasing, contract hire, personal contract hire and finance lease.
At the end of the agreement you will have paid your monthly rentals which is basically to cover the depreciation of the leasing company's asset plus interest costs. The car or van is returned to the leasing company but if you have exceeded the contracted mileage you will be liable for an excess mileage bill.
If the condition of the vehicle is worse than a "fair wear and tear" condition you may also incur a charge to cover the loss to the leasing company.
VAT is applied to the lease rental and can be claimed back, however there are restrictions on this depending on your VAT status.
Contract hire - business
Contract hire is classified as an operational lease and you can also build in other services to your lease agreement such as paying an extra monthly cost for full maintenance cover (including mechanical repair, tyres, batteries and exhausts, or a replacement vehicle for either an accident, mechanical breakdown or both. The road fund licence is also provided by the leasing company and breakdown recovery (RAC or theAA) can also be built into the rental. Some manufacturers provide breakdown cover but usually only for the first year.
As with a normal lease agreement you never own the vehicle and the same terms regarding excess mileage and fair wear and tear apply.
VAT is applied to the rental and can be claimed back however there are restrictions on this depending on your VAT status.
Personal contract hire
Personal contract hire is very similar to a business contract hire agreement however VAT is applied to the operating lease agreement and private individuals cannot recover this. So always look at the personal contract hire rental including VAT as this is what you will pay per month.
Personal contract purchase
This is traditionally a car manufacturer (dealer) car finance method and you essentially agree with the dealer the amount you want to fund, less any deposit or trade-in.
You are deferring part of the loan agreement (the balloon payment) and therefore will be paying a reduced monthly rental, paying the difference between the full loan, the deferred amount and any interest charged.
At the end of the contract you usually have 3 options. Pay the final payment (balloon) and the cars is then yours, just hand it back to the dealer (subject to terms and conditions of mileage and fair wear and tear) without making the final payment, or trade the car in against another car and use some of this money to make the deferred payment (balloon).
Contract purchase agreements can also build in other service features like contract hire i.e. servicing, replacement vehicle, etc.
The deferred payment (balloon) is also known as the Minimum Guaranteed Future Value (MGFV).
Outright purchase
You are using your own funds to purchase a vehicle i.e. spare cash, bank overdraft, or other funding arrangements your business may have, etc.
We have also shown a sample of Audi contract hire and BMW contract hire prices below to give you an idea how much it costs to contract hire. Just click on the link for further details.
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