Contract Hire leases are one of the most popular ways for new vehicles to be acquired in the UK today. This has often been the case with business vehicles, but more and more Personal Contract Hire agreements are now taken, perhaps in preference to the likes of retails finance solutions such as hire purchase or personal contract purchase (PCP).
Why is Contract Hire so attractive?
Well there are a number of tax benefits to businesses, such as ‘off balance sheet’ accounting, and the ability to claim at least part of any VAT back on the lease. However, the overriding advantage is simply that contract hire leases are often at a lower monthly cost than other styles of finance. You see leasing companies will often use huge fleet discounts to procure the vehicles initially. This means that the lease agreement can allow for very low monthly costs, as the vehicle will have a smaller difference between the original discounted fleet price, and its potential residual value at the end of the lease. Manufacturers offer attractive deals to leasing companies who can place a large number of new vehicles to a range of clients.
The main difference between a PCP or Hire Purchase agreement, and that of a Contract Hire lease is simply that you never have the option to own the vehicle in question with a contract hire agreement. The vehicle is usually registered to the leasing company, and you do not have any option to buy as part of the agreement.
Some people do not like the idea of never owning the vehicle, however all vehicles are depreciating assets, and with a simple lease, or rental, you can hand back the vehicle at the end and walk away. This makes budgeting for your vehicle very simple indeed.
So what happens if the lease vehicle is ‘written off’ during the agreement?
As with all vehicles, there is a danger than you could be subject to an accident, fire, theft or flood during the lease, and this leads to your motor insurers deeming the vehicle a ‘total loss’. In this event your motor insurer will normally pay the vehicle value to the leasing company.
However this may not be the end of the matter…………….
Your leasing company may expect more than the vehicle value at that time, they still have outstanding lease payments to collect. This means that you could be left in a situation where your settlement on the contract hire agreement could exceed the motor insurers settlement, with you liable for the difference.
So no vehicle, money to pay the leasing company and still faced with replacing the vehicle. This is not a great situation to be in.
However, you could consider protecting against this event with a Contract Hire Gap Insurance policy.
In the event of a ‘total loss’, a Contract Hire Gap policy will pay the difference between the motor insurers settlement and the outstanding figure required by your leasing company.
For example your original vehicle value is £20,000, and two years later the vehicle is stolen. Your motor insurers settlement is now £12,000 but the leasing company want £15,000 in settlement. Without Contract Hire Gap you are left with £3,000 to pay. If you have Contract Hire Gap then you can pay off the shortfall and walk away.
So the interest in protecting your lease liability is understandable, and can easily be protected with a Contract Hire Gap Insurance policy.