What is an Operating Lease Agreement?
Operating Lease (OL) agreement is very similar to a Contract Hire agreement, in that it consists of an initial rental followed by monthly rentals split over a pre-determined period of time. The pricing is based on the difference between the initial value of the car and the value it is expected to be at the end of the agreement. However, these rentals do not include the Road Fund License in the second year of the lease, so you would have to pay for this yourself. Additionally, where a Contract Hire vehicle is registered to the funder, the vehicle in an Operating Lease agreement is registered to the driver instead.
An Operating Lease agreement may not be suitable for you in certain circumstances. For example:
If you wish to own or buy the vehicle
If you might need to change your vehicle early (early settlement will incur charges)
If you would like to shorten your period of hire by pre-paying
If you do not know what your predicted mileage will be
Business type restrictions, e.g. vehicles to be used as Taxis or for Driving Schools
If you plan to export the vehicle or use abroad for extended periods
If you do not wish to pay for the Road Fund Licence in the second year
If you do not want the vehicle to be registered to you
Benefits of an Operating Lease agreement:
Low initial outlay and fixed monthly rentals
Choice of period of hire from 2 years and a total mileage up to 120,000 miles, maximum 40,000 per annum
The vehicle is simply returned at the end of agreement, removing concerns about disposal values and depreciation
VAT on the rental is reclaimable If you are vat regsitered – 100% on LCVs, 100% on the maintenance element for cars and LCVs, 50% on the finance element for cars (or 100% for cars soley used for business eg pool car)
Tax efficient – up to 100% of the rental cost can be offset against taxable profits
Taking care of the vehicle:
You must ensure the vehicle is comprehensively insured at all times
You must pay any additional charges that you incur eg parking fine, congestion charge etc. on time. If you don’t do this, the charge will be referred to the finance company who take payment from you for this and for an administration charge that they will make
You must have the vehicle serviced and maintained by a main franchised dealer in accordance with the manufacturer’s requirements. If you include a maintenance package please note the funder may decline to settle any related charges if the total mileage on the agreement is exceeded. If you do not service and maintain the vehicle, the funder will make a charge when the vehicle is returned as this will affect its value.
At the end of the agreement the finance company will assess the vehicle condition based on the standards set down in the BVRLA fair wear and tear guide. Refurbishment charges may apply
If you exceed the total mileage charges will apply, please refer to your quotation
When the vehicle is returned, it must have all of the items that were with it when it was delivered eg all keys, locking wheelnuts, otherwise you will be charged for replacing these
Failure to make payments in full and on time may result in the contract being terminated and the vehicle repossesed. Only enter in to an agreement if you are comfortable with the financial commitment and terms.