Contract Hire is a long-term rental/lease agreement between two parties (individual or business, known as the Lessee), to use a vehicle for a set period, which is typically for 2 and 5 years, and for a fixed monthly cost. At the end of the agreement, the vehicle is returned to the company (known as the Lessor), as there is no option to purchase.
As you don’t own the vehicle, you pay for its depreciation within your monthly payments for the lease period, rather than its initial purchase value. The monthly contract hire rental considers: the cost of the car, including vehicle registration fees; road tax; the period of use; agreed mileage; funding costs; and forecast residual value, which is the car’s estimated value at the end of the contract. This can all mean typically lower payments when compared to other finance types and has the added benefit of not needing to take a punt on selling your used vehicle, hoping it hasn’t depreciated much.
Advantages of Contract Hire
- Flexible terms to meet your finance requirements and driving habits, such as variable contract duration and mileage terms
- In the long-term, it allows you to use a vehicle that might otherwise be unreachable in terms of its on-the-road (OTR) cost
- Maintenance of vehicles can be included in the monthly (service) fees, spreading the cost
- When returning the vehicle at the end of your agreement, you do not need to worry about its depreciation or disposal
- A low initial rental payment allows you to determine how much you pay for, what is similar way to a deposit, except you don’t get it back at the end of the contract; it is meant to make your monthly payments more affordable
- Fixed rental costs
Potential Risks of Contract Hire
- There are several fees/charges that could be expensive, so ensure you check these on your agreement: Early termination; agreed mileage; and excessive wear and tear, and damage. In addition, the vehicle must be insured with full comprehensive cover.