What Is Contract Hire (Car Leasing)? A Simple UK Guide

What Is Contract Hire?

Contract Hire is a vehicle leasing agreement in which you pay to use a car or van for a fixed period and mileage, with no option to buy the vehicle at the end.   

• You never own the vehicle.
• Monthly payments are based on predicted depreciation.
• The vehicle goes back to the leasing company at the end of the term.
• You are responsible for the vehicle condition (including maintenance) until you hand it back.

How Contract Hire Works in Practice

1. Initial rental
   An initial rental, often a multiple of the monthly payments, is paid at the start of the agreement. This can be known as the advanced rental. Where you see a lease arrangement quoted as 9+35, the 9 is the advanced rental, followed by 35 additional monthly rentals.
2. Monthly rentals
   Fixed monthly payments are made for the agreed term, typically 2–4 years.
3. Mileage agreement
   An annual mileage allowance is set at the outset. If you opt for a higher mileage allowance, then the cost of the rentals often increases too.
4. End of agreement
   The leasing company collects the vehicle, with no further payment due, subject to mileage and fair wear and tear standards.

Core Features of Contract Hire

Ownership

• You never own the vehicle.
• No purchase option at the end.

Monthly Payments

• Fixed monthly rentals for the duration of the contract
• Payments are based on predicted depreciation and mileage.

Mileage Limits

• You set a mileage limit per year of the agreement, e.g., 8,000 per annum. Under a 3-year agreement, you can cover up to 24,000 miles.
• Exceeding the agreed mileage usually results in extra mileage charges.

Vehicle Condition

• The vehicle must be returned in line with the leasing provider’s fair wear and tear standards.
• Charges may apply for damage outside those standards.

End-of-Agreement Outcome

• The vehicle is returned to the leasing provider.
• The leasing company keeps any residual value.

Early Termination

• Ending a Contract Hire agreement early can incur major charges.
• Early termination costs can exceed the vehicle’s market value in the early years.

Likely Advantages of Contract Hire

• Predictable monthly costs
• No exposure to vehicle depreciation
• No need to sell or part-exchange the vehicle
• Road tax is often included in the rental.
• Suitable for drivers who do not want ownership

Likely Constraints of Contract Hire

• No ownership or equity at any stage
• Mileage limits must be managed carefully.
• Charges may apply for excess mileage or damage.
• Early termination can be expensive.
• The vehicle must be returned at the end of the agreement.

Who Contract Hire May Suit

• Prefer fixed, predictable motoring costs
• Do not want to own the vehicle.
• Change vehicles regularly
• Can accurately estimate their annual mileage
• Use vehicles for business or company purposes.

Common Misunderstandings About Contract Hire

• “I can buy the car at the end.”
  Contract Hire does not include an option to purchase. Some leasing companies may offer you the chance to buy the vehicle outside the lease, but this is not ‘written in’ or guaranteed.
• “Excess mileage can be ignored.”
  Excess mileage is usually charged at a fixed rate and can be costly.
• “Fair wear and tear means no charges.”
  Damage outside the provider’s published standards may result in charges.
• “Leasing is the same as PCP.”
  PCP includes an ownership option; Contract Hire does not. (See What is PCP car finance?)

How Contract Hire Can Affect GAP Insurance

• Your motor insurer will usually pay the current market value.
• The lease provider may require a lease settlement payment.
• This can create a financial shortfall between the insurer's payout and the lease liability.

Summary