Contract hire

Contract hire or vehicle leasing is a type of car finance arrangement used by businesses that need to run a fleet of vehicles. According to the British Vehicle Rental and Leasing Association (BVRLA), this is the most common type of leasing in the UK.

Unlike other car finance options where ownership of the vehicle changes upon completion of payment, contract hire is essentially a rental deal. For a fixed monthly payment, those opting for the arrangement get to use a vehicle for an agreed duration and mileage, which many businesses find suitable as it makes it easier for them to minimise their capital expenditure and also budget.

The vehicle belongs to the company leasing out to a business or an individual - in which case it is personal contract hire - who is required to pay the monthly charge as part of the contract. At the end of the contract the vehicle is returned to the leasing company with no further obligation for the lessee.

Advantages

Advantages of contract hire include fixed monthly costs and for an extra charge, some contract hire firms will throw in a vehicle maintenance agreement, meaning they will take care of maintenance and servicing or even provide replacement vehicles should a need arise.

In addition to being able to claim back 50% of the VAT on the finance cost towards the vehicle, VAT registered firms are also saved the agony of owning a depreciating asset. With cars losing value from the moment they leave the showroom, companies need not worry about the residual value risk as this is the burden of the vehicle's owner.

According to the BVRLA, vehicle leases do not have to be reflected on a balance sheet and this "will improve a company's liquidity ratio, gearing and return on assets".

Not having to fork out thousands of pounds to buy a car also means vital capital is not being tied up and firms can enjoy competitive leasing deals thanks to leasing firms' great purchasing power, which allows them to negotiate cheaper prices with manufacturers.