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The most popular type of vehicle leasing, Contract Hire sees a user hire a vehicle for a set period of time and pre-determined mileage at fixed monthly rentals. There is no option for the user or hirer to purchase the vehicle and at the end of the contract it is returned to the leasing company.
The monthly rental or lease rate usually takes into account the cost of the vehicle including vehicle registration fees, road fund licence, its period of use and agreed mileage, funding costs, and forecast residual value (the vehicle's estimated value at the end of the contract, taking into account depreciation, mileage and condition). This part of the monthly charge is often referred to as the 'finance' element of the rental.
Vehicle mileage will have a big impact on the lease rate because the number of miles a vehicle does has major implications for both its service requirements and resale value. Underestimating mileage can reduce the monthly rental rate for the user, but it can result in them incurring excess charges at the end of the contract if they have exceeded their agreed total mileage limit.
The choice of vehicle model can also be a major factor. Two vehicles can have an almost identical list price, but if one has a much higher forecast residual value this will be reflected in a lower monthly rental.
As with Contract Hire, a Finance Lease allows the lessee to hire a vehicle for a fixed monthly fee, but it also transfers substantially all of the risks and rewards of ownership of the vehicle or van to the lessee. Using a Finance Lease means that the vehicle will appear on the lessee's balance sheet, with outstanding rentals represented as a liability.
A Finance Lease generally conforms to one of two standard formats - the Balloon Lease or the Fully Amortised Lease.
In a Balloon Lease, the diminishing value of the vehicle is reflected in the monthly rental, with a final balloon payment covering the estimated residual value at the end of the contract. If the sold price is above the predetermined balloon payment then the leasing company will usually refund a percentage of the proceeds to the lessee. If the price is below the balloon payment then the lessee will be liable to pay the shortfall to the leasing company.
A Fully Amortised Lease accounts for the full value of the vehicle over the primary lease period within the monthly payments. Under these circumstances the lessee (vehicle user) may be offered a lease on the vehicle for a secondary period at a nominal 'peppercorn' rental.