What is contract hire and who is it for?

If you’ve seen “contract hire” or “leasing” on a car advert and wondered what it actually means, you’re not alone. It’s one of the most popular ways to get into a new car, and one of the least well understood.

Here’s a straightforward explanation from the team at Westaway Motors in Northampton.

What is contract hire?

Contract hire is a long-term rental agreement for a vehicle. You choose a car, agree a term (usually two to four years) and an annual mileage, then pay a fixed monthly rental. At the end of the agreement, you hand the car back.

You never own the car. You’re paying to use it, rather than paying to buy it. That’s why the monthly cost is often lower than other finance options: you’re only paying for the part of the car’s value you use up (its depreciation), plus charges for funding.

You may also see it called leasing, personal contract hire (for individuals) or business contract hire (for companies and sole traders). The principle is the same.

How does it work?

1. Pick your car. New models are the most common choice, from small hatchbacks to SUVs, vans and pick-ups.
2. Choose your term and mileage. For example, 36 months and 8,000 miles a year.
3. Pay an initial rental. This is usually a multiple of the monthly payment, such as three or six months up front. Some deals ask for less.
4. Pay a fixed monthly rental. It stays the same throughout the agreement.
5. Hand the car back at the end. As long as it’s within the agreed mileage and in fair wear and tear condition, you walk away with nothing more to pay.

What’s usually included?

This depends on the agreement, so always check the details. Common inclusions are:

• Vehicle road tax (VED), though check how your agreement treats this
• The use of the car for the agreed term and mileage
• Optional maintenance packages, which can cover servicing, tyres and brakes

What’s generally not included is insurance and fuel or charging. You’ll arrange and pay for those separately.

The pros of contract hire

• Lower monthly payments than many other ways of funding a brand-new car.
• Predictable budgeting. A fixed monthly payment, and the option to bundle in maintenance, means fewer surprises.
• No resale worries. The car’s value at the end isn’t your concern, because you hand it back.
• A new car every few years, often with the latest safety and technology.
• Potential business tax benefits. More on that below.

The cons to be aware of

• You don’t own the car. There’s no option to buy at the end, and no equity to put towards your next vehicle.
• Mileage limits. Exceed your agreed mileage and you’ll pay for each extra mile.
• Condition charges. Damage beyond fair wear and tear can be charged when you return the car.
• Ending early can be costly. Contract hire agreements are fixed, so cancelling early often means paying a significant sum.
• A credit check applies, and approval isn’t guaranteed.

Who is contract hire for?

Businesses and sole traders

Contract hire is very popular with companies of all sizes. It spreads the cost of a vehicle, keeps cash free for the business, and makes monthly costs easy to forecast. Depending on how a vehicle is used, there may be tax advantages, including treatment of rental costs, VAT and company car tax. These rules are specific to each business and change from time to time, so speak to your accountant. See our business contract hire page for more information.

For tradespeople, vans and pick-ups are a common choice. If you’re considering an Isuzu pick-up, ask your accountant how current tax rules apply to the model you’re considering.

Private drivers who want a new car without ownership

If you like driving a new car every few years and have no interest in owning it, personal contract hire can work well. It suits drivers with predictable mileage who value simplicity.

Drivers considering an electric car

Leasing can be an attractive way to try an EV, particularly while the technology keeps moving. You avoid worrying about long-term battery value, because the car goes back at the end. Take a look at our Electric & Hybrid page, and our guide to EV vs hybrid vs plug-in hybrid.

Drivers who want budget certainty

If you’d rather know exactly what you’re paying each month, especially with a maintenance package included, contract hire is hard to beat for clarity.

Who might be better off with something else?

• Drivers who want to own the car should look at HP (hire purchase) or PCP (personal contract purchase). Our guide to PCP vs HP vs lease explains the differences.
• High-mileage drivers may find excess mileage charges expensive, so a higher mileage allowance or HP might be better.
• Anyone who may need to change plans mid-agreement should think carefully, as early termination can be costly.
• If you or a family member receive a qualifying mobility allowance, the Motability Scheme is a separate option worth exploring.

Talk to Westaway about contract hire

Whether you’re a business owner after a van or a driver looking for a hassle-free new car, our team can explain the options in plain English and find a deal that fits. Visit our Contract Hire page, see our finance options, check the latest Hot Offers or contact your nearest dealership.

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