If your business requires the use of vehicles, you’re probably wondering whether it’s in your best interest to lease or buy them. Should you choose to lease them, contract hire is potentially the most appropriate asset finance agreement for you. It’s commonly used for vehicles.
The advantages of leasing vehicles are obvious: you don’t have to pay a lump sum upfront, monthly payments are fixed, and you don’t have to own assets that are depreciating in value.
The term “contract hire” refers to an agreement between a company and a finance provider to lease a vehicle for a set period at a fixed cost. The contract is likely to impose mileage limits since the vehicle remains the property of the lender.
In a contract hire agreement, the lender assumes all the risks and rewards associated with the vehicle. The lender will take the estimated residual value of the vehicle into consideration while determining the terms of your agreement.
Contract hire agreements can be very attractive to businesses because maintenance and servicing costs are usually covered by the finance provider, or they are asked to pay a fixed monthly maintenance fee. When a company owns its fleet of vehicles, maintenance expenses can be substantial and unpredictable.
As you undoubtedly know, every business is restricted in how much it can borrow. If businesses want to avoid pushing this limit by taking out a loan to buy their vehicles, they can use contract hire instead: it’s an off-balance-sheet financing agreement.
Terms and conditions vary between asset finance providers, so it makes sense to compare different offers. If you choose to end your contract hire agreement earlier than expected, a fee is usually imposed.