When using finance to acquire a vehicle, the funding falls initially into one of two main areas, Rental or Asset Purchase.

Rental schemes include Finance lease or Contract Hire (Vat paid monthly)

Asset purchase starts with cash, bank loan, Hire Purchase, Lease Purchase or Personal Contract Purchase (PCP). (Vat paid up front) There are some other loan schemes around which are given marketing names by banks or manufacturers but are essentially a variation to one of the above.

VAT is paid on the monthly rentals on contract hire and finance lease, but up to 50% can be recovered by a registered business and up to 100% on a commercial vehicle.

VAT is paid up front and in full on all forms of asset purchase and cannot be recovered in part or in full by any business, registered or not, unless you are a rental company or a driving school. Vans and commercial vehicles are the exception to this rule.

Contract Hire

Contract Hire is the rental of a vehicle over a set period of time, usually two or three years and covering a pre determined mileage. Maintenance costs can be included within the monthly rental. Apart from the set monthly rental, the only additional cost a customer has is the fuel and insurance.

At the end of the rental period the vehicle is simply handed back. Any damage or excess mileage would have to be paid for but there are no other disposal problems.

Vehicles are off balance sheet and monthly payments are tax allowable.

Contract Hire is a tax efficient funding method with low initial outlay, regular monthly payments and no disposal problems.

Finance Lease

Finance Lease is another form of rental where the monthly rentals are tax allowable. The main difference to contract hire is that the vehicle does appear on the balance sheet and you the customer have the right of disposal at the end of the contract. Any profit from the sale is usually yours to keep. With a four or five year full payout lease, which is typical with commercial vehicles, you can sell the vehicle and retain all of the proceeds except for a small admin fee usually of 5%.

Shorter leases of two and three years usually have balloon payment at the end. You must sell the vehicle to pay off the final balloon but can keep any profit from the sale. Typically you would part exchange the vehicle and use any excess part exchange allowance as a deposit on the new vehicle.

Asset Purchase

With any asset purchase whether paying cash or using one of the funding options explained below, the tax allowance is 25% tax write down per annum up to a maximum of £3000 per year. Commercial vehicle can claim a higher rate in the first year but 25% per annum thereafter and are not limited to the £3000 maximum.

Hire Purchase

This is the most widely used funding method. In simple terms when buying a vehicle you put down a deposit and borrow the rest making regular monthly repayments until the loan has been repaid.

Personal Contract Purchase (PCP)

A PCP is a form of hire purchase but where a guaranteed future value (GFV) for the vehicle is set by the finance company. At the end of the repayment term you have three choices. Pay off the outstanding GFV and keep the vehicle, sell the vehicle and pay off the GFV keeping any excess proceeds or simply give the vehicle back and walk away.

In practice it is usual at the end of a PCP agreement to part exchange the vehicle for a new one.

Lease Purchase

Not to be confused with a finance lease, a lease purchase is basically a hire purchase agreement but using the payment styles offered by finance leasing. Depending on credit score, you may be allowed to get away with a very small initial deposit and defer some of the vehicle cost as a balloon payment to be paid at the end of the agreement.

There are obvious cash flow advantages to this form of finance.

If you are not sure which is the right finance choice for your particular circumstances please do not hesitate to call us, we are here to help and are only too pleased to offer assistance.