Ideal for: Consumers who are looking for a fixed cost of motoring without an option to own the vehicle and VAT registered businesses and sole traders
Contract Hire is a form of flexible leasing used to fund the use of a vehicle. It is a leasing product that primarily benefits VAT registered businesses who are able to claim back the VAT payable on monthly rental payments. Over the past few years however Personal Contract Hire (PCH) has become a very popular way for consumers to pay for the use of a vehicle.
The amount the customer pays over the term of a Contract Hire agreement will be the total amount the vehicle depreciates plus interest and any additional charges.
At the Beginning of the Agreement
- You agree with the dealer or broker the mileage allowance based on the maximum number of miles you are likely to travel each year and the monthly payment this leads to. The higher the mileage allowance the higher the monthly payment will be.
- You agree the advance rental payment you are able to make up front (similar to a deposit), usually this will be the equivalent of 3 or more monthly payments.
- You sign the hire agreement and the dealer or broker then submits your application to the leasing company (lessor). Provided you pass their creditworthiness and affordability checks, the lessor pays for the car on your behalf and hires it to you for the agreed term.
- During the agreement you pay the remaining monthly rental payments.
At the end of the agreement
You will hand back the vehicle to the lessor.
Advantages of Contract Hire
- Lower monthly payments than Hire Purchase or Conditional Sale for a comparable car and term. You are only making payments based on how the car is expected to depreciate, not the initial value of the car.
- Unless you opt out or are a business, your agreement will be regulated which means you have certain legal rights and protections.
- Fixed monthly rental payments throughout the term of the agreement which can incorporate road tax, servicing and maintenance plans making Contract Hire a convenient way of using a vehicle.
- VAT registered sole traders and businesses can claim back the VAT due on monthly rental payments.
Things to remember
- If you exceed the mileage allowance you will be required to pay an additional pence per mile charge as set out in the hire agreement.
- If the car is damaged beyond ‘reasonable wear and tear’ you will also be required to pay charges – set out in the hire agreement.
- You can terminate the hire agreement early but early termination charges are often applied and can be high. The charges will be set out in the hire agreement.
