Company car leasing explained

  • All you need to know about leasing a company car
  • Follow our top tips for what to do if things go wrong
  • Our glossary explains the terms you need to know

Company car or van leasing - otherwise known as contract hire - is a way of renting a vehicle over a long period of time. It's linked to a mileage allowance and allows your company to pay a fixed amount each month for the car or van you want rather than buying the vehicle outright.

You get to choose how long you'd like the lease to run for, and at the end of the term you simply hand the vehicle back.

This means the majority of the costs are fixed. You usually only have to tax, insure the vehicle and pay for fuel.This makes it easier to budget compared to buying and funding a car all by yourself.

Although the fixed costs are an attractive feature of contract hire, there's another aspect to take into consideration. When you buy a new car it's a well-known fact that it'll begin depreciating the moment you drive off the forecourt. With contract hire you avoid this, so it can save you £1000s.

It can also include things such as breakdown cover, maintenance cover, road tax and much more, meaning it can be a true all-in-one package.

Company car leasing is ideal for small firms wishing to run vehicles without having to purchase and manage a fleet. It reduces servicing costs (if part of the agreement), buying and selling the car and administration costs. Once you're finished with the car you just hand it back and order a new one.

It's also ideal for those who need a car but don't travel astronomical mileage - although you do pay a penalty if you stray over your monthly mileage allowance.

Low emission cars are popular with contract hire customers. The reason for this is company car tax, the liability for which is worked out by comparing the car's CO2 emissions to its P11d value.

>> Should you buy or lease a car?

Parkers top tips: Company car leasing essentials

  • When you're looking for a lease company, make sure you take into account the maximum annual mileage and the total number of payments you'll be making over the term of the lease, including the initial deposit.
  • Make sure you know exactly what you'll be paying for. A ‘document fee' may be charged, which might increase your monthly payments.
  • If your company is VAT-registered it'll only be able to claim back 50% of the finance rental, but 100% of the service part of the lease.
  • If you go over the maximum allowed mileage you can incur a ‘pence per mile' charge, so always check the small-print so you know what you're in for should you do more miles than expected.
  • A termination charge may apply if you hand the vehicle back early.
  • Opting for the ‘non-maintenance' contract means you'll be liable for any work that needs doing on your car.
  • You have to insure the vehicle in line with the lease company's policy, and if you hand the car back in a condition that is outside of ‘fair wear and tear' then you may incur a charge.
  • If the vehicle is written off, you may be liable for the difference between the list value of the car and the amount the insurance firm pays out. To avoid this cost means taking out GAP insurance.

Glossary of commonly-used leasing terms

Annual mileage/Contract Annual Mileage - the mileage you're allowed to cover before incurring extra charges. This figure is agreed at the start of the lease.

APR (annual percentage rate) - the way interest is calculated on finance deals. You can compare finance deals with each other by comparing the APR.

Base rental - the amount the rental will cost, excluding VAT

Contract Amend - some lease deals will allow you to change the terms of your contract part of the way through the term. Check with your finance company whether it is possible to change the Contract Annual Mileage, length of contract or type of agreement.

Contract Duration - the period of time the lease runs for.

De-hire Date - the date the contract ends.

Early termination charge - a charge for returning the vehicle early. It is usually calculated using a percentage of the outstanding rentals left, and will vary between companies.

Effective Rental - this is a term used to describe the total amount the car will cost a firm once VAT is claimed back.

Excess mileage - a charge for exceeding the Contract Annual Mileage, usually in the form of a ‘pence per mile' charge.

Fair wear and tear/de-hire damage - if the vehicle you're returning has bodywork damage you may be charged a fee to repair the car.

Informal Extended Hire - at the end of your lease you may decide to keep the car on an informal basis until a new car arrives. However, be aware that you'll be operating out of contract, so the lease company car may ask for their vehicle back at any time and you'd need to surrender it immediately.

Insurance Shortfall/GAP - if your car is written off, the lease company will want back the amount it thinks the car is worth. If the insurance company won't pay out that much then you'll be liable for the difference.

Payment Profile - the number of payments you have to make over the course of the lease, including any initial rental charge.

PCP/Personal Contract Payment - a fixed monthly contract which allows the leaser to buy the vehicle outright at the end of the term.

Purchase discount - a discount offered to buyers by the finance firm. It usually takes the form of an amount off the list price or discounted optional extras, and is worked out before VAT is applied to the cost of the car.

Residual value - the predicted value of the car at the end of the lease period.