What is contract hire?
Contract hire is a type of car finance available to companies, sole traders, partnerships and individuals. It's a leasing agreement that helps fund your use of a car or van - whether through business or personal contract hire. As a form of lease, using contract hire means you don't own the vehicle.
Instead, your payments cover the costs to essentially borrow or rent it. Once the end of your contract is up, you'll hand back the vehicle.
Contract hire is popular among people who like to update their cars regularly, away from the permanent commitment of buying. For fleet managers, it also helps keep your business fleets and company cars fresh and filled with some of the latest models.
In this guide, we explain everything you need to know about contract hire to help decide if it could be worth it for you or your fleet.
How do contract hire and leasing compare?
Contract hire and leasing work in similar ways. With both options, you pay a fixed monthly fee to use your chosen vehicle for an agreed period of time. Where the two differ is once your contract comes to an end.
If you lease a car or van, you usually have two options when the contract ends:
- You can normally buy the vehicle at a lower price.
- Or, you might have the opportunity to earn some of your money back from the sale of the vehicle.
Things are slightly different with contract hire. When your contract finishes, you won't have the option to buy the car or earn anything if it's sold. Instead, you hand the vehicle back to the company where you hired it.
If there's any damage or excessive wear, you may have to pay extra fees. Otherwise, you're free from the contract.
What's the difference between personal and business contract hire?
Business contract hire is often a fleet solution for companies and fleet managers to finance their vehicles and company cars. Personal contract hire covers individuals who want to lease or hire a car for personal use over an extended time.
How does contract hire work?
When you (or your company) hire a vehicle from a leasing company for a set amount of time, you pay a regular monthly fee.
At the start of the contract, you'll also be charged an initial rental fee. This can be a set amount or multiples of the monthly rental. Usually, it's three or six times your monthly rental cost. So, if the monthly payment is £100 and the initial rental is three times that - you pay £300.
You'll also need to agree on an average annual mileage. This is so the company can calculate how it affects the car's value by the end of your contract. Most companies are flexible and allow you to update your mileage agreement if your circumstances change.
What's included with contract hire?
Your monthly contract hire payments cover the cost to use the vehicle, but the leasing company still owns it and is responsible for the associated risks. This includes covering the cost of any maintenance or servicing work.
While these costs are included as part of your contract, if you don't take the car for its service and fail to meet the manufacturer's guidelines, you could face a penalty.
How long does contract hire last?
When you sign a contract hire agreement, you decide on how long it will last. Typically, you can choose between a 24, 36 and 48-month long contract to suit your needs.
What happens at the end of the contract?
Once the contract ends, you return the car to the leasing company. After you've handed the car back, you're free to set up a new agreement with a new vehicle of your choice.
Benefits of contract hire
There are several advantages to contract hire agreements for individuals and fleets:
- Fixed, low monthly rental payments. You know exactly what you have to pay and when from the outset.
- Flexible contract mileage rates. Your circumstances can change during your agreement and most companies offer some flexibility.
- Choice of contract length. With a contract hire agreement, you can choose a length that suits you – whether that’s 24, 36 or 48 months.
- Optional maintenance packages. Enjoy peace of mind knowing the hire company is liable to pay for any servicing or maintenance work your vehicle needs.
- No depreciation risks. You might save money compared to buying by paying for just the car’s effective depreciation, not the total depreciation.
- Regularly update your vehicle. At the end of your agreement, you’re free to choose a fresh vehicle, meaning you could have a new car or fleet every few years.
Things to remember with contract hire
Contract hire is very different from buying a car. As such, there are several things to consider when deciding whether contract hire is worth it for you:
- Cancellation fees. Cancelling the agreement before the contract term ends could mean you face a penalty fee.
- Extra mileage charges. Your contract states your maximum mileage. If you exceed the agreed amount, you may be charged extra to cover the car’s lost value. If your circumstances change and you need to increase your mileage allowance, speak to your contractor.
- You won’t own the car. Unlike buying or contract purchase options, contract hire payments don’t go towards car equity. This means you don’t contribute towards owning the car – similar to renting a house or flat. Once the contract is over, the car reverts to the dealer or lessor.
- Charges for excessive damage. While you won’t have to pay for mechanical repairs, you will have to pay for any excessive damage like scratched paintwork or damaged upholstery.
For more information on how contact hire could work for you, visit our page on personal contract hire.