Business Contract Hire vs Finance Lease

Business Contract Hire vs Finance Lease

Business Contract Hire vs Finance Lease
18 May 2022

If you're a business owner and need a van, you may be wondering what is the right option for you. In our To buy or lease a van guide, we discuss the pros and cons of leasing vs buying a van outright to help you choose.

If you decide to lease your next van, you might encounter an overwhelming amount of information about Business Contract Hire or Finance Lease options. You might feel confused by all this information, but don't worry, we've got it all here.

Van leasing: Business Contract Hire and Finance Lease

Many business operators don't know the difference between Business Contract Hire (BCH) and Finance Lease (FL). Consequently, they choose the BCH simply because it's more popular. For our commercial van leasing customers, we always explain both options so they can make an informed decision. In order to choose the right van finance for your situation, it's critical to understand how both options work. Some businesses would benefit from van Contract Hire, while others would benefit more from van Finance Lease.  Even though these two forms of leasing are very similar, they do differ in some ways.

Contract Hire

One of the most popular types of vehicle lease is Contract Hire, which comes in both personal (Personal Contract Hire - PCH) and business (Business Contract Hire - BCH) forms. When you lease a van on Contract Hire, you pay an initial rental followed by equal monthly rentals for the duration of the agreement. Contract Hire includes the use of the vehicle up to an agreed mileage allowance, as well as road tax. 

At the end of your agreement, you simply return the vehicle to the funder. There will be no additional charges if you return the vehicle in an expected condition (damage-free). In the event that the van suffered damage during the lease (anything other than wear and tear), the funder will charge you since the resale value may be less than expected when you signed the contract. Also, if you went over the agreed mileage allowance, the funder will charge you for the excess mileage as per your contract. This is because vehicles with higher mileage will most likely sell for less than the funder anticipated.   

Finance Lease

Finance lease (FL) is similar to a van Contract Hire in that you pay an initial rental and then make regular monthly payments for the duration of your contract. It covers the use of the vehicle up to an agreed mileage, however, your road tax will only be included for the first year.

At the end of your van Finance Lease agreement, you don't return the vehicle but you must sell it to an unrelated third party (some funders may handle this for a small fee). The proceeds from the sale will be used to pay the balloon payment. The balloon payment represents the residual value of the vehicle at the end of the lease agreement, taking into account its age and mileage, and is determined by the funder before you sign a lease agreement, so you know exactly what to expect. Balloon van lease let you defer a part of your total payment into a larger lump sum at the end of the agreement. This results in lower monthly rentals when compared to other van lease products. 

Finance Lease allows you to share the potential risks or rewards of the residual value of the van. If the proceeds from the sale are not enough to cover the balloon payment, you must make up the difference. However, if you sell the van for more than the balloon payment, you are entitled to keep the difference. A vehicle might sell for less than the funder estimated when calculating the residual value if it has higher mileage than you declared or if it has been damaged in some way (apart from normal wear and tear). If the van was driven below the agreed mileage and has been well maintained, it can trade for more though.  

Finance Lease is only available to businesses, such as limited companies, sole traders, and self-employed people; it is not available to private individuals. 

If you like how the Finance Lease works, you might also be interested in a Flexible Lease which is basically the same but without the balloon payment. 

Summary: what's the difference between van Contract Hire and Finance Lease?

We now have a better understanding of the two popular van leasing options: Business Contract Hire and Finance Lease, so let's summarise the four main differences between them.  

Availability: Contract Hire is open to all customers (personal and business), whereas Finance Lease is strictly a business van financing option.

Road Tax: Contract Hire includes road tax for the lifetime of the agreement, while Finance Lease includes it for the first 12 months only.

Excess Mileage: If you go over the agreed mileage on Contract Hire, your funder will charge you as per your van lease agreement. This won't be the case when you get your van on Finance Lease. However, if you opt for a maintained Finance Lease agreement, excess mileage will be charged but only on the service element.

What happens with the vehicle at the end of the agreement: With Contract Hire, you simply return the vehicle to the funder and that's it. With a Finance Lease, you have to sell the vehicle to a third party and settle any required payments. 

 

Hopefully, this article helped you to better understand the differences between Contract Hire and Finance Lease. As you noticed, both van finance options offer their own benefits and even though Finance Lease is less popular than Contract Hire, it could potentially save you money.

Don't forget to check out our TOP VAN DEALand TOP CAR DEALS to see our hottest offers on both Contract Hire and Finance Lease.

 

Spotted a great deal? Click below to ask for your free quote. 

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