financing leasehire, contract hire & pcp schemes

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Wondering About The Best Way To Finance Your Next Car? Jonathan Crouch Offers A Brief Guide Through The Complexities Of Contract Hire And PCP Financing

Financing your personal or company vehicle has apparently never been easier, though the sheer number of different approaches you can now take tend to often leave the opposite impression. Though there are a large number of alternative solutions, many people tend to end up with the three favourites, contract hire, contract purchase and Personal Contract Purchase, which all provide a very different range of options.

Contract hire

Contract hire offers most of the benefits of ownership without the hassle. You effectively hire the car for a fixed period - three years/60,000 miles or four years/80,000 miles are common - but the duration and mileage limits can usually be varied to suit your needs. You pay a fixed monthly fee and, at the end of the contract, hand the car back to the contract hire company with nothing to pay (provided it meets the mileage and condition criteria agreed at the start of the contract).

You can also reclaim 50 per cent of the VAT on the finance element of the contract. Most of the fleet management can be handled by the fleet provider and the funding isn't shown as an asset on the balance sheet, which again can improve cashflow. At the end of the contract, fleet providers will charge you for any excess mileage and any damage to the vehicle. These charges vary from reasonable to very steep, depending on the fleet provider, so check the small print before you sign.

Contract purchase

Business (and personal) contract purchase (PCP) is another way to own the car through monthly payments. However, it differs significantly from hire purchase in three main ways. First, you decide at the end of the deal if you want to own the car. Second, if you opt to get rid of the car at the end of the deal, you don't have to worry about selling it this, and any fall in secondhand values is the finance company's problem. And third, the finances of the deal are structured in a slightly more complex way.

You pay a deposit the amount is usually pretty flexible. Then you make fixed monthly payments for an agreed period. These payments are almost invariably lower than those of a hire purchase scheme.

At the end of the deal you have three choices:

Make a final, substantially larger payment often called a balloon payment to own the car.

Forget about the balloon payment and walk away with nothing to pay, provided the car meets pre-agreed condition and mileage limits.

Trade the car in for another. In this case, too, you don't make the final payment. Instead, it's covered by the car's second-hand value (this is guaranteed from the outset), provided it meets pre-agreed condition and mileage stipulations. If the car turns out to be worth more than the balloon payment, you can put the surplus towards another contract purchase with the same finance company.

Market leading finance companies like Lex Vehicle Leasing say that the increased growth in PCP is mainly down to the number of drivers who are taking a cash option instead of a company car from their employer. These drivers become responsible for sourcing, running and disposing of their own car, with many turning to PCP as it offers all the benefits of fixed monthly costs and includes all maintenance in that cost, but leaves it down to the leasing company to manage the car. If it is off the road or it needs a new engine, then there are no hassles.

PCP doesn't incur company car tax, you simply convert your employer's cash contribution into a PCP agreement and you simply claim back any business mileage covered through your employer, using either company or Inland Revenue rates.

Overall, it's unlikely that company cars will ever disappear completely. However, it's certain that the market will increasingly look to different finance options to keep its drivers on the road, whether the employer or the employee buys and runs the car.