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What type of funding should I use to buy my next car?

There are several major types of finance. The right type of finance for you will depend on your specific circumstances, for example whether you are a private individual, or a business; whether you are VAT registered or not etc. We can help you select the right method for you, and we have access to several major finance houses, so subject to your status, we can almost always get the right finance package for you.

What are the most common methods of finance?
  1. Personal Contract Hire
  2. Personal Contract Purchase
  3. Contract Hire
  4. Finance Lease
  5. Lease Purchase
  6. Hire Purchase
  7. Sale and Leaseback
  8. Short Term Contract Hire
  9. Daily Rental

Personal Contract Hire

PCH is a Contract Hire Agreement for Private Individuals. It works in exactly the same way as Contract Hire for companies with the exception of VAT. Companies can reclaim this element, whereas with PCH, it is inbuilt into the monthly payment. Deposits are low, normally equivalent to three monthly payments. The payments are based on the term of the agreement and the expected mileage. Excess mileage will be charged to the user at a few pence per mile. Maintenance packages can be included in these agreements, which include your road fund licence. At the end of the contract you simply hand the car back and then you can start again with a new car.

Benefits of Personal Contract Hire:
  • Low initial deposit
  • Fixed Monthly rentals
  • Maintenance and road tax can be included
  • No depreciation to worry about
  • No disposal issues
  • Loan car as standard if your car is off the road
  • Flexible terms

Personal Contract Purchase

PCP has been developed and has been increasingly used since the introduction of the new company car tax rules in 2002. Many individuals crippled with the Benefit in Kind tax have opted for this method of funding their cars. As with Contract Purchase and Contract Hire, the chosen terms of the contract i.e. age, mileage and duration will determine the balloon payment. The balloon payment is the higher final payment required to own the vehicle outright. At the end of the agreement the purchaser may pay the balloon and take ownership or simply hand the car back to the provider. Charges will be made for excess mileage and any damage, which is considered to be over and above Fair Wear and Tear. This form of contract is between an individual and a provider and therefore the individual will not be liable to pay Benefit in Kind tax.

Benefits of Personal Contract Purchase:
  • Low initial deposit
  • No benefit in kind tax
  • Fixed payments
  • Maintenance package facility
  • You can drive the car of your choice
  • Optional final/baloon payment
  • Eventual ownership if desired

Contract Hire

Contract Hire is the leasing of a vehicle for a fixed period of time at a fixed monthly rental. The choices of vehicle and contract terms are flexible to meet your individual needs and requirements. Contract Hire enables companies to release cash normally tied up in outright purchase and allows them to opt for a low deposit followed by fixed all inclusive monthly rental. The low cost attributed to contract hire is because the financial lender is able to reclaim the VAT on the new car and pass the savings onto the hirer in the form of low monthly rentals Contract Hire has a market share of 40% and is still rising. The leasing company calculates a residual value for a vehicle at a set age and mileage contract and charges the user a monthly fee to cover the depreciation over that period plus a funding charge along with add on services such as maintenance and gap insurance. At the end of the duration of the contract, the vehicle is sent back to the provider with no further obligation to either party, subject to terms and conditions.

Benefits of Contract Hire:
  • Low initial outlay
  • Flexible rental pattern
  • Fixed monthly costs which can include maintenance
  • More capital available for your core business
  • Off balance sheet borrowing
  • No depreciation risk
  • No disposal problems
  • VAT on rentals reclaimable if Maintenance included.
  • No disposal problems
  • Administration and Management transferred to provider

Finance Lease

A finance lease is a VAT free method of financing a vehicle that is usually accessed by VAT registered businesses and companies. It is offered to businesses where a moveable asset (the vehicle) is purchased from a supplier, your business can then use this asset while paying an effective rental rather than a repayment. The monthly rental is determined by the initial cost of the vehicle, the period of the finance lease and the residual value, that is the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account. As a residual value is used to calculate your monthly rental, most finance lease companies will insist that you stick to a strict mileage limit as this mileage restriction is used to determine the future value. You have full use of the vehicle during the finance lease period. Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee. Alternatively you could choose to pay the entire cost of the vehicle (plus interest) in monthly instalments. Some finance lease companies may offer you the chance to extend the finance lease with a secondary rental.

Benefits of Finance Lease:
  • Low monthly costs and initial outlay
  • Flexibility of payment options
  • Latest vehicles
  • Up to 50% of the VAT payments can be reclaimed
  • Allows you to feature the vehicle on your balance sheet
  • Hire rental tax allowances can be applied for
  • Maintenance packages often included
  • Proportion of the sale proceeds available at end of lease term

Lease Purchase

Lease Purchase is an ideal alternative to bank borrowing for businesses that are not VAT registered and who want eventual ownership of their cars. This is simply a funding scheme that also favours businesses that prefer minimum payments to assist with cash flow. This is because part of the capital cost is deferred until the end of the agreement and has the obvious effect of reducing the monthly payments. In paying the final balloon payment you complete the agreement and the car is yours to keep. If you trade the car in for another, then any allowance over and above the balloon payment is yours and can be put towards your deposit on your next car. Likewise, if the allowance is less than the balloon, then you are responsible for the shortfall.

Benefits of Lease Purchase:
  • Eventual ownership
  • Low initial deposit
  • The car can be written down in your books
  • All interest paid can be off set against tax
  • No VAT on payments
  • Option to take early settlement
  • No restriction on mileage

Hire Purchase

Hire purchase still commands a 25% share of the market and although it is one of the original methods of funding vehicles. This is available to both companies and private individuals who wish to purchase their vehicles outright. This facility may attract people who wish to pay a varying deposit and wanting agreements up to a 60 month period. Hire Purchase will still be an attractive option for certain businesses who are not VAT registered and want their cars to appear as assets in their company accounts. In addition the vehicle can be written down for taxation purposes and all interest charged can be reclaimed.

Benefits of Hire Purchase:
  • Simple
  • Fixed interest rates from the outset
  • Variable deposits
  • Ownership of vehicle
  • Alternative credit line
  • No restriction on type of car

Sale and Leaseback

A number of companies have historically preferred to buy their fleet outright. Apart from denying the company valuable funds for business development it is not necessarily tax effective. It is proven that some rental allowances can outweigh capital allowances claimed against corporation tax on certain vehicles. This is normally the case with the more expensive cars as the government cap the write down allowances available. Sale and Leaseback is a way of recouping the capital laid out in your fleet and transferring them to a Contract Hire or Contract Lease facility, whereby the provider of the package will purchase the vehicles from the company and Lease them back. This scheme also takes away any risk on the disposal at the end of the contract and frees up valuable management time.

Benefits of Sale and Leaseback:
  • Release of capital
  • Reduction in administration
  • Can be offered for all vehicles, new or used
  • Maintenance packages available
  • No risk on residual values
  • Fixed monthly payments
  • Streamlines cash flow

Short Term Contract Hire

Short term car leasing fills the void in the market between daily rentals and traditional car leasing. The average length of a short term car leasing deal is three 12 months, though some companies do offer rolling contracts for as little as 28 days. Broadly, short term car leasing works in the same manner as a traditional car leasing deal but, as the name suggests, over a shorter period. This means that you will make payments (usually monthly) based on the difference between the value of the car at the start of the term (its retail value) and the value of the car at the end of the term (its residual value). You will also be asked to stick to a strict mileage limit which will be used by the leasing company to determine the residual value. If you exceed the mileage limit you are likely to be penalised as this will affect the vehicle?s depreciation. At the end of the short term car leasing period, you simply return the vehicle to the leasing company and walk away. There is no option to buy the vehicle although if you choose, you could take out another short term car leasing deal.

Benefits of Short Term Contract Hire:
  • Regularly update vehicles
  • Better vehicles
  • Flexible leases
  • Ideal for fluctuating requirements
  • Fixed cost motoring
  • Maintenance packages available

Daily Rental

Daily rental broadly works in the same manner as contract hire, but over a much shorter period. Effectively you hire a car on a day to day basis dependent on your needs. If you need a car over a longer period you may be charged a monthly fee. Usually when taking out a daily rental you will have to comply with a number of rules outlined by the daily rental company. For example, some companies may impose mileage limits dependent on how long your daily rental is due to last. You will also be expected to return the car in effectively the same condition as you picked it up. This means that the vehicle should have the same amount of petrol in the tank as when you took it out and in some cases you might have to pay extra if the car requires a valet. Expect a thorough inspection of the vehicle when you return it from a daily rental, companies will look for scratches, and anything that is not natural wear and tear. As a tip, make sure you inspect the vehicle before you take it out and insist that a company representative notes down any problems. Then, be present when the inspection is carried out on the return of the vehicle so you know exactly what the problems, if any, are.

Benefits of Daily Rental:
  • Excellent stopgap solution
  • Flexible
  • Low cost
  • Road Fund Licence usually incorporated into the agreement

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