How Contract Hire Works: A Plain-English Guide
How Contract Hire Works: A Plain-English Guide
What it is in plain English
Contract hire is a long-term vehicle rental agreement where you pay to use a van for a set period and mileage without ever owning the vehicle. You effectively lease the van from a finance company, making fixed monthly payments for its use, and then simply return it to the lender once your agreed-upon contract term comes to an end.
How it works step by step
The process begins by selecting your chosen van and defining your anticipated annual mileage and contract length, usually between two and four years. Once you receive your quote and the credit checks are completed, you pay an initial rental, followed by fixed monthly payments. You maintain the vehicle throughout, then hand it back to the finance provider at the end, provided it meets fair wear and tear standards.
What you pay and what is included
Your costs typically consist of an initial rental payment, which can be adjusted to balance your monthly outgoings, followed by regular fixed installments. Road fund license is almost always included for the duration of the term. Many businesses choose to add optional maintenance packages to their contract to cover servicing, tyres, and repairs, allowing you to bundle these expenses into your single monthly fee.
Who it suits and who it does not
This method is ideal for businesses that prefer predictable monthly cash flow and want to avoid the risks associated with vehicle depreciation or selling a used van. It is less suitable for those who want to build asset equity, require a vehicle for a very short period, or cannot accurately estimate their annual mileage, as exceeding your limit can lead to additional penalty charges.
Questions to ask before you sign
Before committing to an agreement, clarify exactly what is covered in the maintenance package and what the excess mileage fees will be if you go over your estimate. Ask about the specific criteria for fair wear and tear to avoid unexpected charges upon return. Finally, confirm if there are any options to extend the contract if your business needs change unexpectedly.
FAQs
How does contract hire work from first quote to handing the vehicle back? It starts with selecting your van and mileage, followed by credit approval. You pay an initial rental and fixed monthly instalments. During the term, you operate the vehicle as your own. Finally, you return the van to the finance company at the end of the term, ensuring it meets agreed fair wear and tear standards.
Do I own the van at the end of a contract hire agreement? No, contract hire is strictly a rental agreement. You never take ownership of the vehicle, which is why the monthly payments are often lower compared to finance products where you are paying to own the asset.
What happens if I go over my agreed mileage? If you exceed your annual mileage limit, you will be charged an excess mileage fee for every mile over the agreed amount. These costs are calculated at a pence-per-mile rate specified in your contract.
Can I end my contract hire agreement early? Terminating a contract early is generally difficult and can be expensive. Most finance companies will charge a substantial early termination fee, so it is important to choose a term length that you are confident you can commit to.
contracthire.tv is a trading name of Swiss Vans Ltd, authorised and regulated by the Financial Conduct Authority (FRN 668283) as a credit broker, not a lender.