Do you need to renew your current car and don’t want the hassles any more that come along with car ownership? Then maybe you should consider getting a new motor through personal contract hire.
- What is personal contract hire?
- How does it work?
- What are the benefits?
- What happens at the end of the contract?
- What are the best cars to put on personal contract hire?
“If it appreciates, buy it. If it depreciates, lease it”
Your car is not like your house which, usually, appreciates in value over a number of years after its purchase. When you drive your brand new car away from the car dealership it’s already losing value, sometimes rapidly.
If you take out a car loan or a hire purchase agreement to buy a car, you’re simply paying a set amount a month for something that’s losing, not gaining, value.
Personal contract hire is car leasing which is actually just like long-term car rental. You pay regular monthly payments for the term of the contract, but at the end of the agreement you simply return the car to the supplier as the car is never technically owned by you.
Personal contract hire, or personal car leasing as it’s sometimes known, has always been extremely popular in the United States – one in four cars across the pond is leased rather than bought outright.
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The finance provider works out what the value will be of the car at the end of your agreement. This projection takes into account the age of the car at the end of the contract, your estimated annual mileage and the projected market value.
Your payments are then calculated and you pay that fixed monthly amount for the duration of the contract.
There are lots of benefits to hiring out a car, one being that you can drive a brand new vehicle every two or three years without worrying about it depreciating, running out of warranty or how to sell it on.
Personal car leasing has recently become more popular in the UK, but many drivers who could benefit from leasing their car are still taking out expensive car loans or hire-purchase agreements to buy their vehicles.
The main reason for this reluctance to lease is usually because people just don’t know the benefits of leasing and the confusion caused by the terminology that surrounds it. So let’s try to explain why it’s a sensible option that all Moneymagpies should at least consider.
Firstly, it is all about cash flow. Monthly repayments on contract hire or personal car lease deals are invariably between 35% and 50% cheaper than those on a bank loan or purchase agreement, so you get to keep your monthly costs as low as possible.
Secondly, you could be able to drive away in a car that may well be out of your price range in terms of purchase price and you can change it for a shiny new one usually every two, three or four years.
There are no huge up-front costs, just a small deposit which normally equates to about three months’ worth of payments. You can also include all of the maintenance costs as well as road tax, but make sure that you get the right deal here as it can load up the costs.
At the end of the agreement you simply hand the vehicle back, subject to mileage and condition. Each contract is calculated using the number of miles that you expect to drive each year. If this is exceeded then you pay an additional mileage charge (pence per mile).
Contracts can usually be amended if necessary to accommodate changing circumstances, but the only issue is that you can’t buy it once the contract is over .
By handing the car back to the finance company, you’re left free from the worries about its depreciated value and you don’t have the hassle of trying to sell it on or re-financing it.
How many times have we heard stories that when someone bought their new car, the salesman said: “It’s a lovely car, we can’t get enough of them” only to find that out some three years later: “It’s such an out-of-date colour”, “We’ve had nothing but trouble with these” or “No-one wants this old model any more”?
With contract hire you don’t have this worry, you just hand the keys back and hopefully pick up your new car.
It’s important that the car that you lease loses as little value as possible over the term of your lease or hire agreement.
Traditionally, cars made by German manufacturers depreciate considerably less than other makes. So look at cars from the likes of BMW, Audi, Mercedes-Benz or the ever popular Volkswagen.
For example, the BMW Series 1 and the Volkswagen Golf are extremely popular due to the high residual values that remain at the end of their lease.
Depending on lease term, mileage and what company you lease from, pricing for the Audi A3 Diesel Hatchback can range from £189.95 + VAT to £279.95 + VAT per month.
Test drive some great cars
Why not test drive a few cars you’ve always wanted to try out?
If this doesn’t seem like the right thing for you, why not check out our guide to getting the cheapest deal when buying a car.