If you’re in the UK and looking to lease a van for your business, you’ll likely find yourself deciding between Finance Lease vs Contract Hire. These two finance products are among the most common business van leasing
options available in the market.
In this blog, we will help you navigate the features and differences of Finance Lease and Contract Hire so that you can make an informed decision that aligns with your needs and ensures a seamless and efficient leasing
experience. Let’s dive in!
What is Van Contract Hire?
Van Contract Hire, also known as Business Contract Hire (BCH), is a popular way for businesses to finance a new vehicle. When you lease a vehicle with a BCH agreement, you make regular monthly payments for the use of the van for a flexible contract duration (two to five years). BCH typically requires an initial rental, also known as a deposit, which is paid in the first month of the agreement. This deposit is usually equivalent to 3 to 12 monthly payments. Additionally, you need to set the estimated mileage limit, specifying the maximum number of miles per year you can drive the vehicle during the contract period.
Van Finance Lease explained
The Finance Lease option is only available for business leasing and not available for private individuals. It is similar to a Business Contract Hire in terms of fixed agreement duration, deposit requirements, and annual mileage limits. You won’t be able to keep the vehicle at the end either. So what’s the difference?
Finance Lease vs Contract Hire: the key difference lies in what happens at the end of the contract agreement
While Contract Hire and Finance Lease have much in common, the key distinguishing factor is what happens at the end of the van leasing agreement.
Once you complete all the Business Contract Hire payments, the vehicle is returned to the funder once all payments are completed. However, with a Finance Lease, you are required to sell the van to a third party at the end of the agreement and use the proceeds to pay the balloon payment at the end. Alternatively, you can ask the funder to sell it on your behalf for a small fee. The balloon payment represents the estimated value of the vehicle at the end of the lease term and is calculated based on the original cost of the vehicle, and the expected mileage and age of the vehicle at the end of the contract.
The table below offers a convenient overview of the key features and differences between Contract Hire and Finance agreements:
| Contract Hire | Finance Lease | |
|---|---|---|
| Availability | Business & personal lease | Business lease |
| Contract length | 2-5 years | 2-5 years |
| Mileage limit | Yes | Yes |
| Deposit | Yes | Yes |
| Road Tax | Included | First 12 months |
| Balloon payment | Optional | Optional |
| Vehicle ownership | No | No |
| Baloon payment | No | Yes |
| End of agreement | Return the vehicle | Sell the vehicle |
| Damage charges | Yes | No |
| Excess mileage charges | Yes | No |
| Depreciation risk | No | Yes |
| Potential rewards | No | Yes |
Choosing the best van lease deal: Contract Hire or Finance Lease agreement?
Both Contract Hire and Finance Lease serve the same purpose, allowing you to benefit from driving a brand-new business van without the high costs associated with a purchase. There is no inherently better or worse choice; it all depends on your specific needs.
If you run a busy company and need a convenient and straightforward fleet van leasing solution, Business Contract Hire may be the perfect choice for you. With easily managed monthly rentals, Business Contract Hire allows businesses to access the latest models of commercial vehicles without concerns over their depreciation and ownership responsibilities.
On the other hand, Finance Lease offers more control over managing your van. At Commercial Vehicle Contracts, we particularly recommend Finance Lease agreements for leasing commercial vehicles like tipper vans, Luton vans, or dropsides, where there is a higher risk of damage. Additionally, if your business is in a growth phase and you’re uncertain about your mileage requirements, a van Finance Lease could be a better fit.
While the Finance Lease option may initially sound more burdensome compared to Business Contract Hire, there are advantages to consider. Firstly, because a portion of the leasing cost is included in the balloon payment, monthly payments on a Finance Lease contract are typically lower than those on a Business Contract Hire. Additionally, since the vehicle is not returned to the funder at the end of the agreement, you avoid excess mileage or damage charges that may be incurred with BCH – but bear in mind that excess mileage and damages might decrease the vehicle’s resale value. Finally, if you properly maintain the van and don’t use the allocated mileage, there is a possibility that you’ll sell the vehicle at a price higher than the balloon payment, allowing you to keep the difference. Business Contract Hire doesn’t provide this opportunity, and any additional profit from the sale proceeds would go to the funder.
On the other hand, when you take out a Finance Lease, any fluctuations in the market value of the van will directly impact you. This means that you may experience either positive or negative effects depending on the direction of the used van prices. If the prices go up, it could be advantageous for you. Conversely, if the market prices fall below the agreed residual value, you will be responsible for covering the shortfall between the sale price and the balloon payment. In contrast, with Contract Hire, the risk lies with the lessor (finance company), rather than with you as the lessee. However, it’s important to note that the leasing company also receives the entire reward in such cases.
