Why do you have to declare your annual mileage when leasing a vehicle?

11 January 2021

Mileage allowance in vehicle finance

If you're looking to finance a car or a van, then it's likely that you've come across mileage allowances. A pre-agreed mileage allowance is typically seen with Personal Contract Purchase (PCP) finance, Personal Contract Hire (PCH), Business Contract Hire (BCH) and Finance Lease (FL) options, which basically means that every vehicle finance agreement where you don't keep the vehicle at the end of the contract will have a mileage limit. You will need to agree on a set annual mileage allowance for the period of the lease. If you agree to 10,000 miles and your contract is for 4 years that means you have 40,000 miles to use over the duration of your contract.

 

Why do you have to pre-agree the annual mileage allowance when leasing?

It's all due to the depreciation of the vehicle. Depreciation is simply how much your car or van is worth after a period of use. As it gets older and used more, the van or car depreciates in value. Plus. the more miles it has on its clock, the greater the depreciation, which simply means it decreases in value. When you lease a vehicle the depreciation is taken into account and included in your monthly rentals.

The annual mileage allowance in your finance agreement helps your funder to estimate a residual value of your vehicle once the lease period ends - in other words - how much the vehicle will be worth when you hand it back.  Since your funder will then have to sell it, it is an important factor when calculating your monthly rentals. Higher mileage allowances mean higher monthly rentals.

 

What annual mileage should you declare?

It is necessary for you to choose a realistic mileage allowance for your personal or business needs.  Your mileage allowance is completely down to you; your funder cannot ask you to agree to a certain limit. If you are confident that your driving needs won't change compared with the previous years, it is worth checking your past MOT certificates for a fair idea on the mileage allowance that you'll likely need. Or, you can check how many miles you cover in an average month and then multiply it by 12. We advise that you average your mileage over a year because you may be using your vehicle more in the winter when it's cold but less in summer when you go on holiday abroad or walk more enjoying the weather - keep these in mind so your estimation is as accurate as possible.

 

What is the maximum mileage allowance?

There is no official limit on how many miles you can declare but even though it varies between finance companies, most are unlikely to cover more than 50,000 a year or 180,000 over the agreement. This is because, as we explained above, the more mileage the vehicle does, the less it's worth at the end of the term. It wouldn't be worth it neither for you to pay such high rentals nor for the finance company to try to sell the vehicle with such low value at the end of the agreement.

There is nothing to worry about as with this many miles available and with the right guidance from Commercial Vehicle Contracts, you can be assured that you'll agree to a suitable mileage allowance.

 

Does your finance provider track your mileage annually?

Even though you need to pre-agree an annual mileage when signing the contract, your finance provider will not be checking your clock every year. If you signed the contract for 24 months with the annual mileage of 10,000 miles, your odometer simply should not exceed 20,000 when you hand the vehicle back. You could use 5,000 in the first-year and 15,000 in the second year of your agreement - it's completely up to you.

 

But what happens if you go over the agreed mileage?

When you hand your vehicle back and its odometer is over the contracted mileage, you will be charged for the excess mileage. We'll cover this topic in our next article "Excess Mileage Charge: Going over your agreed mileage in a lease car or van". Find out what happens when you return your leased vehicle and the clock shows more miles than it should.

For more information, contact us and find the best vehicle leasing option and appropriate mileage for your needs.



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