If you’re looking to lease a van for business in the UK, it is likely that you’ve come across two of the most popular options: Contract Hire and Finance Lease. Both of these van leasing options offer unique advantages and disadvantages, so it’s important for businesses to get familiar with both products before making a decision.
In this article, we will explore both products and compare Contract Hire vs Lease Finance, focusing on the benefits and drawbacks of each option for UK Ltd companies and sole traders.
What is Contract Hire?
Contract Hire for business, also known as Van Contract Hire, is a popular method of leasing a van for business use. It involves a fixed-term agreement where a business pays a monthly fee to use a van without ever owning it. Once the contract is over, the van is returned to the leasing company with nothing left to pay. This is, of course, providing that the vehicle has no damage or exceeded mileage.
Benefits of Contract Hire
- Lower monthly payments: As you are only paying for the depreciation of the van during the lease term, monthly payments are typically lower compared to other van finance options, such as purchase.
- Fixed costs: Contract Hire agreement offers a maintenance package, allowing your business to budget more effectively and avoid unexpected costs.
- No depreciation worries: As the business never owns the van, there is no concern about the vehicle’s depreciation or the need to sell it at the end of the contract term.
- VAT benefits: VAT-registered businesses can typically reclaim 100% of the VAT on the monthly rentals and 100% of the VAT on maintenance costs.
Disadvantages of Contract Hire
- No ownership: Your business will not have the option to own the Contract Hire van at the end of the contract term.
- Mileage restrictions: Van Contract Hire agreements have strict pre-agreed mileage limits, with excess mileage charges for going over the limit.
What is Finance Lease on a van?
Van Lease Finance is an exclusive business van leasing product not available for personal leasing. It is a flexible leasing option, similar to the van Contract Hire, that allows businesses to essentially rent a van for a fixed period of time. When the Finance Lease contract ends, you are required to sell the van to a third party. Alternatively, you can ask the funder to sell it on your behalf for a small fee. The funds from the sale are to be used to pay the pre-agreed balloon payment.
Benefits of Finance Lease
- Lower monthly payments: Lease financing is usually less expensive than other types of van finance, and usually also cheaper than Contract Hire.
- Fixed cost: When you Finance Lease a van you have one fixed monthly payment, plus an optional maintenance package that can help avoid unexpected extra costs.
- No excess mileage charges: Despite having a pre-agreed mileage limit, you won’t be charged for going over it. However, if you exceed your mileage allowance, there is a risk that the van will be worth less when you sell it and you will have to bear the difference out of pocket.
- No damage charges: The funder will not charge you for the damage to the van, but because of diminished value and other factors, you might have to sell it for less than what is owed on your balloon payment.
- Tax benefits: Van Finance lease rental payments are tax-deductible, and VAT-registered businesses can reclaim the VAT on the payments.
- Potential to earn some money back: If you look after the van and sell it for more than the balloon payment, you can keep the difference!
Disadvantages of Finance Lease
- Selling the van: At the end of a van Finance Lease agreement, you are responsible for selling the vehicle and making the balloon payment.
- Depreciation risk: If the van’s value depreciates more than expected at the point of signing the agreement, your business may need to pay the difference between the actual value and the residual value agreed upon in the contract.
Contract Hire vs Finance Lease
When comparing Contract Hire and leasing for your business, consider your specific needs and priorities.
If you prefer a hassle-free, straightforward van leasing option with low monthly payments and no concerns about depreciation or selling the vehicle, Contract Hire might be the better choice for you.
On the other hand, if you require more flexibility, a Finance Lease may be a more suitable choice. At Commercial Vehicle Contracts, we recommend Finance Lease especially when leasing commercial vehicles such as tipper vans, Luton vans or dropsides, where there is a higher risk of damage. When your business is still growing and you’re unsure about your mileage, a van Finance Lease might be a better option, too.
Not only that, but Finance Lease payments are usually lower than any other type of van financing- and you can potentially benefit from the vehicle’s depreciation.
Van lease or finance?
The main difference between van leasing and van finance lies in the ownership and payment structure. Van leasing involves a fixed-term agreement where a business pays a monthly fee to use a van without ever owning it. On the other hand, van finance refers to purchasing a van through various financing options, such as Hire Purchase, where the business eventually owns the vehicle after completing the payment terms.
Van leasing typically offers lower monthly payments, fixed costs, and no concerns about depreciation. In contrast, van finance allows businesses to own the vehicle and may offer more flexibility in terms of mileage and usage, but may involve higher monthly payments and depreciation risks.