We explain the differences between the vehicle leasing products available.
What options do I have when looking for a Personal Vehicle Lease?
We look at the easiest question to answer first. In a nut-shell, the options available to individuals looking to lease are less than that of those for a businesses entity.
The majority of people looking to finance a vehicle will nowadays enter into a Personal Contract Purchase agreement or a Personal Contract Hire agreement. The alternative if you have a lump sum is to buy your new vehicle outright.
Personal contract purchase (PCP) is the equivalent of a loan to help you get a car. However, unlike a normal personal loan, you won’t be paying off the full value of the car and you won’t own it at the end of the deal (unless you choose to pay the final balloon payment due at the end of the contract).
It’s one of the more complex financial products available to help you purchase a car, but it can be broken down into three main areas:
The deposit (usually around 10% of the car's list price). Funders / Dealers offering PCP finance will usually want circa 10% of the car as a deposit. Some car manufacturers' finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you're buying a new car but the requirement is you take their finance. The larger the deposit, the less you'll have to borrow.
The amount you borrow. The amount you'll have to borrow is based on how much the finance company / lender predicts the car will lose in value over the term of the deal (usually 24 or 36 months but you can have longer) minus the deposit you've put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs start from around 4%.
The balloon payment (a large final payment you pay IF you want to own the car). Also referred to as the Guaranteed Future Value (GFV), this is how much the dealer expects your car to be worth after your finance deal ends, agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.
Personal Contract Hire works in many ways similar to traditional car financing agreements:
Make an initial deposit. This can be the equivalent of three, six or nine months’ worth of instalments.
Make set monthly payments for the agreed length of time.
Return the car to the leasing company at the end of the agreement.
It sounds a lot like how a personal contract purchase (PCP) agreement works. And for the most part they’re quite similar.
The main difference is that with a PCP agreement, you have the option of keeping the car after making a larger end of term ‘balloon payment’. With PCH, that option isn’t there. You give the car back after making your monthly payments.
So, PCH is a form of long-term car hire rather than a way to own a car outright.
Most PCH agreements come with an annual mileage allowance that you’ll agree to beforehand.
If you exceed this allowance, there could be an extra charge per mile you go over.
What options do I have a as a business looking to Lease a Vehicle?
For businesses ICR offer several options. The two most common being Business Contract Hire (BCH) or alternatively, a Finance Lease Agreement.
Business Contract Hire
Small initial deposit – this will free up your capital.
Fixed monthly payments – you pay an agreed amount each month throughout your contract. This can assist you in controlling your vehicle cost and improve cash flow.
Tax efficient – all the rentals made under the lease agreement are treated as an operating cost and therefore can reduce the taxable profit on the business by as much as 100% of the total rental payable.
Off Balance Sheet Funding – this frees up your credit lines and allows you to invest into your business.
Reduce Administration – no more having to haggle for the best purchase price and no more problems with selling your vehicle. At the end of the contract you simply hand the vehicle back without the worrying of how much it might be worth, and select a new one. Maintenance – this can be added to the contract and encompass the service, maintenance, repairs which also includes tyres.
Finance Leasing enables flexibility and tax advantages to companies but don't have the capital to pay for them up front.
As part of a finance lease agreement you can choose to pay either the entire cost of the vehicle, including interest charges, over an agreed period. Alternatively, pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle ( the ‘balloon payment’). Throughout the agreement, the vehicle remains the property of the leasing company.
ICR will have set an expected sale price of the leased vehicle at its contract end, and whilst the vehicle remains the property of ICR leasing, When the vehicle is sold at the end of the contract the customer will get 95% of any profit if the vehicle sells for more than the anticipated expected value.
This type of agreement is not available to private individuals. It is a particularly popular option for businesses because of the significant tax advantages.
If your company chooses to take out a finance lease on a brand new vehicle, you will be hiring it for a specified period of time (three or four years, for example) and make regular monthly payments to rent it.
Your business will be able to use the vehicle without facing the high upfront cost of a buying new, and still have the assets show on your company’s balance sheet.
At the beginning of the lease, usage terms for the vehicle are agreed. Providing these parameters are met, monthly payments and interest rates are fixed for the contract duration.
If you operate a VAT registered company, you can reclaim between 50% and 100% of the VAT payments depending on whether you are renting a car or commercial vehicle. If your company is not VAT registered, you can choose to spread the VAT costs across the term of the lease by incorporating it into your monthly rental.
Your payments could be offset against taxable profits.