What is Contract Hire?

What is Contract Hire?
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What is Contract Hire?

In simple terms, Contract Hire (Business Contract Hire or Personal Contract Hire) is a method of funding for the use of a vehicle for a set period of time, essentially like hiring a vehicle, but not the overall ownership of it.

It allows you to choose the vehicle you want, use it for a set period of time and an anticipated mileage and then give it back at the end of the period of hire. The risks are therefore with the leasing company under contract hire agreements.

The customer rents the vehicle for a fixed period of time and pays a fixed (normally monthly) rental for the use. The customer is not responsible for the disposal or sale price of the vehicle at the end of the contract – which makes it a very easy and risk free way to run a vehicle.

The only risk to the customer is where the agreed mileage limit is exceeded or if the vehicle is not maintained and kept in good condition.

What do the rentals cover?

The rentals paid by the customer should cover the depreciation costs of the vehicle over the term of the agreement plus interest, but not the full cost of the vehicle. The leasing company will have a residual value risk at the end of the term.

Payments

Deposits are not taken, however Advance Rentals are usually paid by the customer at the start of the term. The amounts are usually agreed by the customer and the leasing company but three, six or nine advance rentals are common.

The payments made are based on the price of the vehicle, the term of the lease and agreed mileage.

The rentals during the remainder of the terms will be ‘spread’ equally over the term, or there may be a terminal pause.

All the rentals will attract VAT at the current rate.

During an agreement

The customer agrees to make regular rental payments to the leasing company as per the Contract Hire agreement and must keep the vehicle fully insured and in a roadworthy and good general condition.

Service and maintenance plans are sometimes incorporated into Contract Hire agreements to provide the customer with fixed cost motoring which can help with budgeting and planning.

The end of the agreement

At the end of the contract term, the customer will have paid all the agreed rental payments. The vehicle would be returned to the leasing company and the customer is not responsible for the sale of the vehicle.

If the vehicle has exceeded the agreed mileage, than a pence per mile charge plus VAT would apply to each mile over the agreed amount.

If the vehicle has not been maintained or serviced according to the manufacturer’s recommendation, or ‘fair wear and tear’ has been exceeded, the customer would be charged to compensate for the poor condition of the vehicle.

A Contract Hire agreement can be settled at any point during the term, however penalties for doing so are often high.

A customer can request to extend the length of the contract past the originally agreed period; there may be a change in the rental amounts to do so.

What are you waiting for?

The benefits of a Contract Hire agreement to a customer are vast. With a fantastic choice of vehicles and an affordable way of having a new car every few years, what is there to lose?

Contact us today to find out how we can help you!

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