Contract Hire - CH
This is a way to finance vehicles. A company or individual hires a vehicle from a provider for a specified period and makes regular monthly payments to rent it. The leasing company retains ownership of the vehicle and is responsible for the associated risks. At the end of the contract period the vehicle is returned to the leasing company. This method is off the balance sheet for business users.
» Contract Hire in more detail
Personal Contract Hire - PCH
Also known as personal leasing, Personal Contract Hire is a long-term rental agreement and works the same as Contract Hire. You make monthly payments for the part of the car that you use and at the end of the contract you return the car without any further obligations. Check to ensure quotations include VAT.
Maintenance
This is offered with agreements and includes routine maintenance and servicing (at manufacturer’s recommended intervals), mechanical repairs and replacement parts, tyres, batteries, and exhausts.
Payment Profile, 3+23, 3+35, 6+35 or 3+47
This dictates the number of payments required on a specified monthly basis. This is the payment profile. Consisting of one initial payment equivalent to one or more of the monthly rentals (normally 3 monthly rentals are required to be paid initially) followed by the duration of the contract thereafter. Multiple rentals are requested by the finance company as an initial rental as security for the agreement. The higher an initial payment the lower the monthly rental, Finance companies normally allow up to 12 payments in advance.
Terminal Pause
The number of Rentals is equal to the number of months of the agreement. When the finance provider asks for multiple rentals in advance the hirer will enjoy a payment holiday at the end of the agreement. i.e. a 24 month agreement for instance could require 3 rentals in advance followed by a further 21 rentals 3+21.
Spread Rental
Instead of having a payment holiday as with Terminal Pause the hirer can spread the rentals over the full period, therefore on a 24 month agreement the hirer would pay 3 rentals in advance followed by 23 rentals, 3+23, meaning a total of 26 rentals are paid over the 24 month period and in doing so lowering the monthly cost although the overall cost would remain virtually the same as a terminal pause agreement.
Advance Rental
This is the amount required by the finance company to be paid in advance before the customer take delivery of the vehicle. Normally 3 Rentals are required although it is not uncommon to pay 6 or 9 rentals in advance of the start of the contract. The Advance rental is not refundable at the end of the agreement.
Finance Rental
This is the financial part of your Service Rental agreement. For Contract Hire, it includes the Road Fund Licence. For business users 50% of the VAT can be reclaimed from this element if the vehicle is used for business and personal use.
Service Rental
This is the service part of your Financial Rental agreement and it covers the maintenance, relief vehicle and breakdown services, where selected. With contract purchase, the service rental also includes the charge for Road Fund Licence. For business users 100% of the VAT can be reclaimed from this element of the rental.
Effective Rental
This is the term used for the true cost to a business for the monthly rental. Most vehicles on contract hire are used for business and personal use. The effective rental is the finance rental with 50% of the VAT added to it and then the service rental if applicable with no VAT (as all the VAT can be reclaimed from the Service Rental).
PPM or Excess Mileage Charge
Pence per mile or the Excess Mileage Charge is the amount agreed on the hire contract that you will be liable to pay if you exceed the agreed mileage. This is normally charged per mile.
PCP or Personal Contract Purchase
Personal Contract Purchase involves an initial deposit and then a series of monthly payments. There is also an agreement about what the car will be worth at the end of the contract – this is the minimum guaranteed future value. The monthly payments are the cost of the vehicle after the MGFV and the value of your deposit have been deducted. At the end of your PCP you have the option of either paying off the MGFV and taking ownership of the vehicle, or handing it back. There may be restrictions on your annual mileage and you are expected to maintain the car to a high standard.
» Personal Contract Purchase in more detail
Balloon Payment
A balloon payment sometimes comes at the end of a purchase agreement. It is the amount you have to pay if wish to buy and keep the vehicle that you have taken out a contract on. This can also be referred as a GMFV which is a balloon payment that is guaranteed by the finance company as a minimum amount you will receive for the vehicle if you wish to hand it back at the end of the agreement period.
GMFV / GFV
Guaranteed Minimum Future Value / Guaranteed Future Value (not applicable for Contract Hire Agreements)
Hire Purchase (HP)
Hire Purchase is a loan linked to a specific purchase, such as a car. It’s a way of obtaining the use of an asset before payment is completed - once you sign the agreement you can drive the car away the same day. An HP contract involves an initial deposit, or 'down payment'. Then you 'hire' the car you are buying for a fixed period, during which time you pay for it in monthly installments, plus interest. At the end of the agreement, the car is yours to ‘purchase’. As the purchaser you won't own whatever you're buying on HP until you complete the payments.
Lease Purchase
Lease purchase is a way of financing a vehicle whereby the period and the estimated future value of the vehicle which is based on the proposed annual mileage. At the end of the agreement, once the balloon payment has been made the vehicle is owned by the hirer. Lease Purchase is an alternative to Hire Purchase which does not offer a balloon payment or GMFV.
Contract Purchase
This is a way to finance vehicles. A company hires vehicles from a provider for a specified period and makes regular monthly payments to rent them. The difference from Contract Hire is that the company or driver can then purchase the car at the end of the contract for a predetermined amount (balloon figure) as long as the terms of the agreement have been completed. Generally, this method is on the balance sheet.
Finance Leasing
Finance Leasing is a flexible, tax-efficient way for your business to acquire the assets it needs without using up valuable cash reserves. You may realise some value at the end of your agreement term. Similar to Lease Purchase.
BIK, Benefit in Kind
This is a term commonly used as the amount to be added to a persons salary to calculate the extra tax they will pay when receiving a company benefit, such as a company car. It’s also referred to as ‘List Price’ for tax purposes and includes VAT, the list price of any options, including VAT, and the manufacturer’s delivery charge but does not include the Road Fund Licence.
CO2
This is the abbreviation for carbon dioxide. The amount a car emits in g/km is used to calculate how much company car tax and Road Fund Licence it attracts.
Depreciation
This is what happens to your car’s value over time. A variety of factors can affect your car’s depreciation: not just the make and model, but also the accessories and optional extras you choose, the mileage you drive and the way in which you maintain your vehicle. With Contract Hire depreciation is a risk taken by the finance company, the hirer is only responsible to meet the monthly rentals.
Formal extension
This is when the customer wants to extend their contract by three months or more. It’s also known as the secondary period.
Informal extension
This is when a customer wants to extend their contract for a short period, but doesn’t want to be tied to a formal extension.
Early Termination
A contract can be terminated early. The termination figure is calculated from the remaining rentals, taking into account the vehicle’s current value. Termination figures have to be requested on an individual basis. Early Termination Insurance is available by insurance providers. Check and read all the terms and conditions to ensure the insurance product provides all what you require.
Hire Purchase Information - HPI
HPI provide a search facility of the database maintained by HPI Limited. This search will report, amongst other results, whether a vehicle or other asset is subject to any interests of another party, usually another Finance House.
Manufacturer’s List Price
This is the manufacturer’s basic price of the vehicle, excluding options and VAT, and before any discount is applied.
Road Fund Licence
This records that Vehicle Excise Duty (VED) for the vehicle has been paid and it’s currently regulated by CO2 emission levels and fuel type.
Sales Agency Agreement
This comes as an option with Contract Purchase agreements. It allows customers to exercise their options at the end of the agreement. If the option is not taken out at the inception of the agreement, the customer will have to pay the balloon payment and keep the car.
Sale and Leaseback
Sale and Leaseback is a good way for companies that own a fleet of company cars to increase its available cash. The fleet is purchased from the company in question at proper market value (the ‘sale’ part) and the company then hires back (leaseback) the fleet by whatever funding scheme it sees fit. With Sale and Leaseback, depreciation is put onto the buyer of the fleet, and the company gets an instant cash reserve increase.
SMR
This is an abbreviation for Service, Maintenance and Repair.
Whole-Life Costs or WLC
These are some, or all of the expenses likely to be incurred by the vehicle operator. Some of these are quite obvious, like Depreciation, Servicing Costs and Fuel for example. However, there are other factors to be considered that are often forgotten. Typically, these might include Funding Costs, Insurance, or Employer NI and it’s very important that the supplier can provide authoritative and accurate data for every car model.
APR
The Annual Percentage. APR’s are not applicable for Contract Hire agreements as they are hire contracts not purchase agreements. APR’s by law have to be shown on all purchase quotations.
Rate
This is the true rate of interest you are paying on a Finance purchase or PCP agreement.
GAP Insurance
In the event of a contracted vehicle being written off, G.A.P Insurance covers any shortfall in amount paid by insurers to the amount outstanding by a Finance Company. There are two main policies available, Finance GAP and Back to Invoice GAP. Finance GAP will pay out any insurance shortfall to of the outstanding finance provider. Invoice GAP will pay out from the insurance settlement back to the vehicle’s original purchase amount. Check any polices Terms and Conditions carefully to ensure the policy is suitable for you.
MRP
Manufacturers Recommended Price. Normally the list price before any discount.
P11D value: The P11D is the value of the vehicle when new including any Manufacturers or Dealer options. This value is used by both company car users when calculating their own company car taxation and the Inland Revenue for taxation purposes.
