Van Contract Hire Explained - Is It Right for Your Business?
With several van finance options available, it can be difficult to know which one is best suited to your business - find out why van contract hire can be best for your business.
Below we delve closely into the concept of contract hire – one of the most popular choices for business van operators – and explain exactly how it works, what you can expect to pay, and how it compares to the alternatives.
What is Contract Hire?
Contract hire is a type of long-term vehicle rental. You pay a fixed monthly rental to use a brand-new van for an agreed period – typically between two and five years, with three-year agreements being the most common. At the end of the contract, you return the van – simple as that.
Unlike the standard hire purchase, once the contract expires you do not own the van, and there is no option to purchase the vehicle. All in all, contract hire is a structured long-term rental rather than a route to eventual ownership.
The monthly rates are calculated based on the difference between the van's purchase price and its projected residual value at the end of the contract. And because you are not financing the full value of the vehicle, monthly rentals under a contract hire agreement tend to be lower than with other finance options.
How Does Van Contract Hire Work?
As soon as your van is selected you agree three key variables with your finance provider:
- The initial rental,
- The annual mileage allowance,
- The contract length.
These determine your fixed monthly payment for the duration of the agreement.
Finance quotes are usually expressed in a format such as '3+35', meaning you pay three months' rental upfront as an initial payment, followed by 35 monthly payments thereafter. Minimum initial payment is three monthly rentals, though paying more upfront will reduce your ongoing monthly cost.
Once you’ve entered the contract, you are responsible for keeping the van in good condition in line with ‘BVRLA Fair Wear and Tear’ guidelines. At the end of the agreement, you return the van, freeing you from all payment obligations. You are then free to adopt a new contract hire agreement on a different vehicle, or simply not renew.
It is worth noting that exceeding your agreed annual mileage will result in additional charges, calculated on a pence-per-mile basis. Agreeing a realistic mileage limit at the outset will be advisable to avoid unexpected costs at the end of the term.
What Do I Need to Get Business Contract Hire for Vans?
To apply for a contract hire agreement at Vansdirect, you will typically need to provide the following:
- Your company's details and registration number (if a limited company),
- The business's annual turnover,
- Director's details e.g. name & DOB,
- Company bank details,
- Five years of address history.
- An email address to complete the application.
Finance is subject to status and acceptance by the finance provider.
What are the Benefits of Contract Hire for Vans?
Contract hire is straightforward budgeting. Monthly payments are fixed, which makes forward financial planning significantly easier for businesses. At the end, there are no concerns around the van's resale value or depreciation – those risks sit with the finance provider.
Opting for a contract hire with Vansdirect also means you are always driving a relatively new van. When the agreement finishes, you can move straight into the latest model. This has practical advantages for businesses that want to keep their fleet modern and well-presented, free of any purchase obligations.
Additionally, if the van is used solely for business purposes, you can reclaim 100% of the VAT on your monthly rental payments – a substantial tax advantage.
As with most contract hire agreements, maintenance packages are available, covering servicing, brakes and tyres, simplifying fleet management further and reducing the risk of unexpected repair costs.
What are the Points to Consider?
Contract hire is slightly less flexible than some other finance options. You cannot own the van at the end of the agreement, and there are restrictions on modifications – any signwriting, for instance, should be applied using removable vinyl to avoid damaging the paintwork, as damage charges will apply on return. For businesses that rely on external signwriting, this restriction might present some challenges.
Furthermore, exceeding your agreed mileage or returning the van in a condition beyond fair wear and tear could incur additional charges, so it is vital to assess your business requirements carefully before signing an agreement.
In general, if you think you may want to keep the van or adapt it significantly, contract hire may not be the right option for you.
It is also worth checking whether courtesy vehicles and breakdown cover are included in your specific agreement, as this can vary.
How Does Contract Hire Compare to Other Van Finance Options?
At Vansdirect, there are three main finance routes available.
Business van leasing (finance company van lease) resembles contract hire i.e. monthly payments are made over an agreed term. However, at the end of a finance lease, there is a balloon payment to settle – the idea being that the van is sold to a third party to cover this amount. Any proceeds from the sale in excess of the balloon payment are largely retained by the lessee. Van leasing offers slightly more flexibility in some areas, and is a popular option for SMEs and sole traders.
Hire purchase is the only finance option that results in ownership of the van. The deposit is typically equivalent to the full VAT amount on the vehicle, which means monthly payments are not subject to VAT. There are no mileage restrictions or usage conditions with hire purchase – the van is yours once the final payment is made. Monthly costs are, however, higher than contract hire or leasing as a result.
Buying outright remains an option for businesses that can fund the purchase, though depreciation is an inevitable consideration, and keeping a van for longer to offset that cost simply means higher maintenance spending over time.
For businesses that prioritise predictable costs, minimal administrative overhead and access to new vehicles on a regular cycle, contract hire is frequently the most practical solution.
Contract Hire Vans Direct
Are you interested in exploring van contract hire at Vansdirect? Browse our current contract hire deals or get in touch with our specialist team to discuss the right option for your business.
Van Contract Hire – Frequently Asked Questions
How Much Does Van Contract Hire Cost?
Your monthly rental is determined by the initial rental amount, your chosen annual mileage and the length of contract.
Paying a higher initial rental reduces the monthly payments that follow. If you drive more miles per year than the agreed allowance, your monthly payments will be higher to reflect that, and exceeding the agreed mileage at the end of the contract will result in an additional per-mile charge. Contract hire payments tend to be lower than comparable hire purchase deals because you are only financing the depreciation of the van, not its full value.
Do I Have to Return the Van at the End of the Contract?
Yes. At the end of a contract hire vans agreement the van must be returned to the finance provider. There is no option to purchase the van at the end of the term. Once it has been returned in good condition you are free to take out a new agreement on a different vehicle.
What is the Difference Between Van Contract Hire and Van Leasing for Business?
Both options involve paying a fixed monthly rental over an agreed term, and neither results in outright ownership. The key difference lies at the end of the contract. With a finance van lease, there is a balloon payment to settle, which is typically covered by selling the van – anything above the balloon payment is largely returned to you.
With contract hire, there is no balloon payment; you simply hand the van back. Contract hire is generally simpler in this regard and is often preferred by businesses that want a clean, uncomplicated end-of-contract process.
Is Van Contract Hire Tax Deductible?
Yes. Where a van is used exclusively for business purposes, you can reclaim 100% of the VAT on the monthly rental payments. This makes business contract hire a tax-efficient option for many company operators.
However, it is advisable to consult a qualified accountant or tax adviser to confirm the position for your specific circumstances.
