January 14, 2019

Cost Effective Vehicle Leasing

We Compare the Long and Short-term Leasing Options

The cost-effectiveness of leasing a vehicle largely depends on who you lease it from, the terms of the agreement and what you compare it to.

Leasing a vehicle

Leasing a vehicle can have significant advantages over outright purchase, not the least of which is that large amounts of capital don’t have to be committed and can be preserved for other uses. Budgeting is easy, as the payments should remain the same throughout the term of the agreement. There are other considerations, however.

Long-term leases

Traditional leasing agreements usually run for a minimum of two years, most often three and sometimes four years or longer. When you have known vehicle and accounting requirements, a stable workforce and want consistency, then longer-term leasing arrangements are often ideal.

Longer-term leasing is a widely understood and widely available vehicle funding product. Because of the contract duration and the experience of the providers, the end of contract values, depreciation curves and maintenance requirements are reasonably predictable. Therefore, the contracts can be priced effectively and competitively.

But, once you have agreed to a contract and the provider has committed to the finance provision, your flexibility is limited if  you want to exit an agreement early. Early terminations are a fact of life in the motor finance industry, because the providers base all their calculations on the parameters you set/agree at the outset. If you need to change them after the event, you can expect the provider to want to protect themselves against losses.

Short-term leases

Until relatively recently, the only short-term leasing option was day-hire which can be prohibitively expensive. However, in answer to a growing need for something in between the two leasing options, a third alternative is now available in the form of leasing which falls into an intermediate timeframe.

This can be extremely cost-effective, as you can lease vehicles for the exact time that they are needed, be it a few weeks, a few months or a whole year.

This is particularly beneficial if your company experiences seasonal highs and lows in trade and hence variable need for transport, or if you have new staff regularly being employed on a trial basis, for example. You can arrange a short-term lease for the periods you need and hand the vehicles back at the end of the agreement.

If you need the vehicle for longer than the term you signed up for, you can just take out another lease and either keep the vehicle or swap it for a new one, depending on how old it is and how the leasing company works.

With some short-term leasing agreements, the cost of servicing and maintenance can be factored into the monthly or quarterly costs. This relieves you of the problem and the costs don’t need to be budgeted for separately.

Vehicles subject to short-term leases of up to 12 months don’t have to be included as company assets, making the balance sheet simpler, while still gaining the advantage of being able to reclaim 50% of the VAT paid on the lease fees.

An example

Here’s an actual example of costings for leasing a vehicle on a long-term lease against a short-term one.

A pretty standard, 2-year lease on a VW Golf GT would cost £5759.91 +VAT. With a mileage allowance of 16000 miles over the two years, the figures equate to £0.36 pence per mile. It has to be noted, however, that the maintenance costs of servicing and tyres are not included in this agreement.

Looking at an available short-term lease of 6 months on the same brand and model of car, the cost over the term is £2402.88 +VAT. With an allowance of 12000 miles, the cost per mile is just £0.20p. Surprisingly, this deal also includes servicing and tyres if needed.

Decision Making

It might surprise you to find that short term leases, giving you the greatest level of flexibility, may actually be cheaper than leases that commit you to a longer term.

In terms of your decision making, what would suit you best will be determined by a number of factors:

  • vehicle selection
  • mileage
  • vehicle purposes etc.

Once you are clear about what you need, give us a call on 0800 776 5940 and ask about our Mini-lease product, which is the model that the second example (above) comes from. You can also visit www.clm.co.uk/vehicle-rental/mini-lease

Regardless of the leasing duration, leasing remains the most popular and cost-effective means of acquiring/funding business vehicles. As service provision has evolved to meet the developing needs of UK businesses, you have access to a broader range of options than you had previously, giving you ever greater flexibility and control.