Contract Hire Explained

Contract Hire is a leasing product, and differs from our finance products because it does not allow the customer to take ownership of a car. In the following guide we have explained what is meant by Contract Hire and how it works.

Creditplus Definition of Contract Hire

Contract Hire is a leasing product where you simply rent the vehicle by paying set monthly payments. Contract Hire is not a loan as you are not paying the monthly payments to take ownership of the vehicle. Because you rent the vehicle, it is considered a service and therefore VAT is payable on the monthly rentals. If you're a VAT registered company you can claim back the VAT on the rentals.

Before the Contract Hire agreement starts you'll need to agree an annual mileage limit with the car leasing company. The total number of miles that a car travels throughout the term of the agreement will impact the residual value of the vehicle at the end of the agreement. It will also affect your monthly payment price - the more miles you drive, the higher the monthly cost will be. If you exceed the agreed annual mileage limit, there will be a fee applied for every mile over that limit. The fee will vary depending on the vehicle and the type of Contract Hire agreement, but it's typically a couple of pence per mile.

The payments can be kept very low in a Contract Hire agreement because the leasing company only has to cover the difference between initial purchase value and the value of the vehicle at the end of the lease agreement. The vehicle is owned by the leasing company for the duration of the rental, and typically you give the vehicle back at the end of the agreement.

Contract Hire also includes road tax in the monthly rentals and you can choose to add varying levels of maintenance to cover servicing and MOT costs. This means you could take a new car on a Contract Hire agreement and only have to pay for fuel and insurance on top of the monthly payments for the duration of the contract.

The risk with the vehicle depreciation is taken by the leasing company providing the Contract Hire. This is because the leasing company retain the ownership of the vehicle and therefore it's their responsibility at the end of the agreement whether it is worth more or less than the value they initially guaranteed.

Wikipedia Definition of Contract Hire

Vehicle leasing is the leasing (or the use of) a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term (usually 2,3 or 4 years) the vehicle has to be returned to the leasing company for disposal…”

Business Car Finance

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