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Personal car finance deals are rising in popularity, especially with small businesses where the simplicity of personal contract hire provides all the benefits of business contract hire but without the accounting requirements for a company car

Personal car finance: flexible and hassle-free leases

MORE people are turning to personal car finance as a way of funding their cars. What’s the attraction of personal car finance, and why you should consider it?

Editor Ralph Morton provides this special report with additional commentary from Fleet Alliance on the appeal of personal car finance.


THE car finance market has been on an upward trajectory recently: in the most recent figures available, car finance hit an all-time high in the year to May 2011, 56% of new car sales using motor finance – the highest share of the market since March 2009, reported the Finance & Leasing Association, the trade body for the motor finance industry.

Take-up of leasing and personal contract purchase agreements for new cars were up by 14% in the last 12 months compared to the previous 12, reported the FLA, while Hire Purchase agreements fell by 20% over the same period.

Clearly, the once almost universal desire to own a car is being replaced by the concept of using a car for a defined period – and with no hassle of selling the car later.

The recession, no doubt, has had an influence on this change in mindset. Cash is short. What’s available has to be spent wisely and spread more thinly. A large chunk lavished on a new motor car, then, doesn’t hit the mark in these straightened times.

But with a personal finance deal, the entrance requirement is modest: usually a three-month up front rental deposit for personal contract hire agreement; or a larger deposit on a personal contract purchase agreement where the contract provides an option to ownership at the end – should that be your wish.

Many of the small business owners I’ve talked to recently have expressed a keen interest in this form of car finance: a new car for affordable monthly amounts. It’s highly attractive – especially when the current car is being pushed beyond the limits of acceptable business use. Or desirability.

What sort of personal finances are there?

There are two main types. Let’s deal with personal contract hire first.

As its name implies, the product is closely related to business contract hire – but with the VAT added. So you decide on a mileage/period of time – usually three years and 10,000 miles a year – and then at the end of that period you hand the car back with nothing more to pay, provided it meets with the lenders’ return requirements – usually these are agreed BVRLA fair wear and tear conditions. For your part, all you need do is to keep the vehicle in good condition, fuel, insure and service it. You also get to benefit from the same monthly lease rentals as larger companies – plus the additional VAT of course. All simple and straightforward stuff.

A Personal Contract Purchase is more complex. Essentially you pay a deposit, and having agreed a time/mileage period on the car, a Guaranteed Future Value (GFV) is established at the end of that period and mileage. Sometimes this is referred to as a balloon. You then pay the finance on the difference between the cost new minus the deposit and the GFV – essentially funding the depreciation plus interest.

At the end of the agreement when you reach the balloon stage, you have three choices depending on whether the car is valued at more than the balloon or less: pay the balloon and take ownership of the car; trade the vehicle in for another using any excess equity in the value of the car over the GFV as a deposit (or simply sell it and make a profit); or hand the car back to the dealer – particularly useful if the car’s value is below the GFV, which then means the dealer takes the hit. It’s certainly more complex; but there are also more options open to you.

Personal leases and business

Many small business owners prefer a personal lease both for themselves and staff. As the car is personal, there is no accounting for it in the company books – so it’s simple to administrate.

Any business mileage is also simple to administrate through the Approved Mileage Allowance Payments (AMAPs) system. This was given a welcome boost in April when the Chancellor increased the amount payable for the first 10,000 business miles from 40p per mile to 45p per mile, essentially making £4500 available tax-free for business usage – although you are required to keep detailed records of that mileage to show to the taxman should they ask. (Beyond 10,000 business miles, the rate drops to 25p per mile.)

Where can I get a personal lease?

Personal leases are widely available both from car dealers – who often have very good deals on specific models – as well as BVRLA-approved car leasing brokers and some leasing companies, although you’re more likely to find a PCP at a car dealer, and personal contract hire at a car leasing broker.

Simple to understand and cost-effective, no wonder personal leasing is making such an impact with small businesses – especially when other forms of business lending is so difficult to obtain from the banks – with its attractive offer of a new car for an affordable monthly rental.

Fleet Alliance expert comment on personal car finance

We have also seen the number of personal clients choosing personal leasing over traditional retail finance steadily grow over the last couple of years.

As businesses continue to enjoy the hassle free benefits offered by contract hire, many individuals have now decided to take advantage of the many personal contract hire (PCH) deals now available.

There are many benefits which were traditionally only available to business users, now being offered to individuals via PCH contracts such as, fleet discounts, no disposal risk, as well as included maintenance and service contracts. A fully maintained PCH contract also offers the customer a simpler and more effective method of controlling their vehicle running costs.

David Blackmore
commercial director of fleet solutions provider, Fleet Alliance

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