Funding Methods - Contract Hire

How it Works:

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 depreciation over that period, plus a funding charge, along with add-on services such as maintenance and accident management. The user takes no risk in ownership and has predictable monthly costs. The user effectively just pays for the use of the vehicle.

Advantages:  

Ø Cashflow little or no payment.

Ø Costs are predictable and risk-free.

Ø Payments take into account the vehicle's future residual value, so the user doesn't have to repay the entire capital cost.

Ø Vehicles are off balance sheet.

Ø The administration and management burden can be transferred to a third party.

Disadvantages:

Ø Perceived inflexibility: because costs are incurred for early termination due to the vehicle's depreciation, condition and excess mileages, but these are similar to any other form of acquisition.

Ø Not suitable for fleets with unpredictable mileage patterns, although excess mileage pooling can spread the variance.

Ø Generally no gain on sale - but no loss either, although risk-sharing deals may be available for larger fleets.

Summary:

The major beneficiary of the August 1995 VAT rule changes. Set to steal volumes from Hire Purchase in particular, but also Contract Purchase. Overall, a convenient and hassle free funding method - especially if you opt for a full maintenance package.