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FinanceAcar: Home »car finance options » Contract Purchase Explained

Business Contract Purchase

Contract Purchase is a form of car leasing.  It is very similar to Contract Hire but for contract purchase at the end of the lease the business has the option to buy the car for a price agreed when the contract was signed.

Businesses obtain a vehicle with a fixed monthly payment for the lifetime of the contract, usually between 2 to 4 years.  At the end of the period the business has the option of either obtaining a new company vehicle and lease contract or buying the car outright for the pre-agreed amount.

Advantages of Business Contract Purchase

Business Contract Purchase is a popular option for businesses because:

  1. Contract Purchase frees up cash instead of investing it in a non-core depreciating asset since there is  a smaller initial payment required (the equivalent of only 3 months payments upfront);
  2. It avoids financial risk as the business is not committed to the entire cost of the vehicle and allows for predictable costs;
  3. The business spends significantly less each month (as much as 60%) than it would need to spend on a loan or ‘hire purchase’ (it gets a ‘bigger bang for its buck’);
  4. There is no need to arrange or negotiate to sell the vehicle when a new one is required;
  5. There is no market value risk arising from the vehicle because it does not need to be sold in the open market at any point;
  6. The business can select the exact requirements online and have them delivered;
  7. Road Tax is often included in the price for the length of the contract;
  8. Maintenance and services can be included in the monthly payment as an add-on.

These first eight advantages are similar to Contract Hire, in addition Contract Purchase could be more suitable if:

  1. The business may consider retaining the vehicle for an extended period and would prefer to have a predictable final payment to allow this;
  2. The business has its own view on whether the car may retain its value better than the funding company believes.

Disadvantages of Business Contract Purchase

As with Contract Hire:

  1. The business is limited to the annual mileage chosen upfront, over and above which excess mileage fees will be incurred;
  2. Contract cancellation incurs a termination fee (which should be determined before the contract is signed);
  3. The vehicle can not be modified for any particular business purposes.

Furthermore, Contract Purchase will likely have:

  1. Higher monthly payments than Contract Hire;
  2. A higher total vehicle cost than Hire Purchase;
  3. VAT which can not simply be claimed back in full as for Contract Hire, which may not be an issue for small companies which are not VAT registered or those on HMRC’s Flat Rate Scheme

Hint: Some brokers or even dealers may try to sell you something they call a Contract Purchase, but in fact is what should be called a Finance Lease. This requires the business to pay the final (‘balloon’) payment and purchase the vehicle, and this payment will likely be debited automatically.



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