Contract Hire: A Simple Guide

Contract Hire is a popular form of vehicle finance, primarily used by businesses but also available to individuals. It’s essentially a long-term rental agreement for a vehicle, typically spanning between 2 to 5 years. At the end of the contract, the vehicle is returned to the finance company.

How Contract Hire Works

You pay fixed monthly rentals for the duration of the agreement. These rentals cover the depreciation of the vehicle, plus interest and any maintenance package you choose. The initial rental is usually higher than subsequent monthly payments and is often expressed as a multiple of the monthly cost (e.g., 3 months initial rental). Factors affecting the monthly cost include the vehicle’s value, the contract length, the anticipated mileage, and any optional maintenance package.

Key Benefits of Contract Hire

• Predictable Costs: Fixed monthly rentals make budgeting easier. You know exactly what your vehicle expenses will be each month, allowing for better financial planning.
• No Depreciation Worries: You don’t have to worry about the vehicle’s value depreciating. At the end of the contract, you simply hand the car back.
• Maintenance Options: Many contract hire agreements include a maintenance package covering servicing, repairs, and replacement tires. This further reduces unexpected costs.
• Tax Advantages for Businesses: Businesses can often claim back a portion of the VAT on the monthly rentals and maintenance costs. Rental payments can also be offset against taxable profits. Consult with a tax advisor for specific details.
• Access to New Vehicles: Contract Hire allows you to drive a new vehicle without the upfront cost of buying it outright. You can regularly upgrade to the latest models.

Important Considerations

• Mileage Restrictions: Contract Hire agreements have strict mileage limits. Exceeding these limits results in excess mileage charges, which can be significant. Accurately estimate your annual mileage before entering into an agreement.
• Early Termination Fees: Ending a contract early can incur substantial fees. It’s crucial to carefully consider the contract length before committing.
• You Don’t Own the Vehicle: At the end of the agreement, the vehicle is returned to the finance company. You won’t have the option to purchase it (unless specifically agreed beforehand).
• Credit Check: Contract Hire requires a credit check. Your creditworthiness will affect the rental rates offered.

Is Contract Hire Right for You?

Contract Hire is ideal for individuals and businesses seeking a hassle-free way to access a new vehicle with predictable costs. It’s particularly beneficial for those who don’t want the responsibility of vehicle ownership and prefer to drive a new car regularly. However, it’s essential to carefully consider mileage requirements, potential early termination fees, and the fact that you won’t own the vehicle at the end of the agreement.