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The A-Z business fleet guide – C is for Contract purchase/contract hire

As part of our Fleet For Growing Businesses hub we’ve taken a some key business fleet terms. In this instalment, we look at contract purchase and hire.
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When you decide to purchase a vehicle for your business, one of the first questions will always be: how can I afford this? This is where the option of contract purchase or contract hire will surface.

Purchasing a car outright is a big expense for any small or medium-sized company in the UK, especially if you’re operating on a tight budget. Fortunately, there are other options to consider.

Car leasing will typically refer to contract hire. Under this sort of agreement, you pay monthly instalments to take control of the vehicle for affixed period, but never actually own the vehicle.

This might initially seem unfair – you’re still paying out every month for an asset that you’ll never own. However, the way the costs are often calculated is the cost of the car upfront, minus the cost of the car at the end of the contract, factoring in depreciation and so on.

Meanwhile, contract purchase is very similar, with the addition that at the end of the agreement you can stump up a “balloon payment” and take ownership of the car.

This is optional, and the amount is agreed at the beginning. Essentially, you get a really thorough test drive of the vehicle before you commit to keeping it.

However, just because the balloon payment is optional does not mean this always the best method of financing a new asset – although there is increased flexibility, it is often more expensive than a contract hire.

It is worth noting that a mileage limit may apply – be sure to be up front and honest about how much travelling you are likely to do.

If you’ve found this article useful then make sure you visit our complete A-Z of business fleet terms, which provides a complete glossary so you can make an informed purchasing decision.

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About Author

Letitia Booty

Letitia Booty is a special projects journalist for Real Business. She has a BA in english literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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