What is an initial rental on a lease?

An initial rental is the first, larger payment you make when a contract hire agreement starts, before the regular monthly rentals begin. It is usually quoted as a multiple of the monthly rental, and it counts towards the total you pay over the contract.

The short answer

It is not a refundable deposit. It is an advance part of your rental payments. Choosing a larger initial rental generally lowers the monthly rental, and a smaller one generally raises it.

The detail

How it is expressed. Quotes usually describe the initial rental as a number of monthly rentals, such as "three months upfront" or "nine months upfront". The pounds figure then follows from the monthly rental.

What it is not. A deposit on a purchase or a security deposit is typically tied to the asset or held against damage. An initial rental is a payment for use of the vehicle, so it is normally not returned at the end of the contract.

Why it changes the monthly rental. The funder is recovering the cost of the vehicle's expected depreciation, plus its charges, across the term. If more is paid at the start, less needs to be spread across the remaining months.

How funders structure it. Some quotes show the initial rental as part of the contract's total number of payments, and others show it in addition to a full set of monthly payments. Always check how many monthly payments follow it and what the total payable is.

VAT. For business contract hire, VAT is normally added to rentals, including the initial rental. Whether you can reclaim it depends on your VAT status and on the vehicle. Restrictions can apply to cars, and vans are treated differently. Check with your accountant.

Early termination. If you end an agreement early, charges may apply under the funder's terms. The initial rental you have already paid does not usually reduce them in a straightforward way, so read the early termination terms before signing.

Credit and approval. Contract hire is subject to a funder's credit assessment and acceptance. We are a credit broker, not a lender, and we cannot promise that any application will be accepted or on what terms.

A worked example

This uses symbols rather than real prices, to show the arithmetic. It is not a quote.

Suppose you compare two options for the same vehicle on the same 36-month term:

• Option A: a small initial rental, then a higher monthly rental, M(A).
• Option B: a large initial rental, then a lower monthly rental, M(B).

For each option, the total paid in rentals is:

initial rental + (monthly rental × number of monthly payments that follow it)

To compare the options fairly, work out that total for both and compare them side by side. Then consider cash flow. Option B costs more on day one but less each month. Option A keeps more cash in your business at the start.

Also confirm whether each quote counts the initial rental inside the 36 months or on top of 36 monthly payments. Two quotes can look similar and still differ here.

Related questions

• How many months upfront should I choose on a business lease?
• What is the difference between an initial rental and an advance payment or deposit?
• Is the initial rental subject to VAT on business contract hire?
• What happens to my initial rental if I hand the vehicle back early?
• How do mileage allowance and contract length affect the monthly rental?

Questions people ask

Is an initial rental the same as a deposit?

Not quite. It is usually treated as part of your rental payments for using the vehicle, not as a sum held against the vehicle and returned later. Check the wording in your agreement.

Can I choose how big the initial rental is?

Often you can choose from a range of options, such as a set number of months upfront. The available options depend on the funder and the vehicle. We can request quotes with different initial rentals so you can compare them.

Does a bigger initial rental mean I pay less overall?

Not necessarily. It lowers the monthly rental, but the total across the contract may be similar. Compare the total payable for each option, not only the monthly figure.

Do I get the initial rental back at the end?

Normally not. It forms part of the rentals for the contract term. Any refund or credit would only apply if the agreement says so.