If you need a van for your business, you may be tempted to buy outright, but there are alternatives. You’ll find many different finance options that can help you to spread the cost of the vehicle and improve your cash flow. This guide will help you understand the alternatives.
If you have the cash available, then buying a van outright can be an attractive option. The van is yours, so you’re free to dispose of it whenever you want, and you can choose when and where to service it - all things that may be restricted under other options.
On the other hand, you have a depreciating asset that will be worth a lot less when you come to sell it. You’ll also have to pay for servicing and repairs yourself. For start-up businesses there’s also the problem of coming up with a relatively large amount of cash in order to buy the vehicle. You also have the problem of selling the van when the time comes to change it.
If you do decide to buy, it makes sense to keep the van for a long time as this offsets the depreciation, though you’ll pay more in maintenance and repairs. It’s worth looking out for dealers offering fixed-price service plans.
Hire purchase has been around for many years and is often seen as the traditional way to purchase a vehicle. It is one of the easiest ways to finance buying a van. The way it works is you pay a deposit of 10 per cent or more of the purchase price - this could be covered by trading in another vehicle - and then you pay a fixed monthly amount for the length of the contract. Contracts are usually between one and five years in duration, and at the end you make a final payment to transfer ownership of the vehicle to you from the finance company.
Interest rates are fixed at the start, so you don’t need to worry about payments changing over the length of the agreement, and the deposit required is relatively low. However, you don’t actually own the van until the last payment has been made, and it can be repossessed by the finance company until at least a third of the value has been paid. Unlike leasing deals, there’s no option to walk away at the end of the agreement: you have to make the final payment to own the vehicle.
With contract hire you still pay a monthly amount, but you’re leasing the vehicle over the period of the contract and never actually own it at the end. This can be an attractive option for business users, as the van is not a capital cost.
Because the monthly cost takes account of the value of the van at the end of the contract, vehicles that depreciate slowly, like VWs and Mercedes, are often better value on contract hire. Things to watch out for are that there’s usually a mileage limit, and you’ll be penalised for exceeding it. On the plus side, servicing is often included in the contract, so you have full control over running costs.
Personal Contract Purchase (PCP)
PCP is now one of the most common ways of financing a vehicle. It combines the best elements of hire purchase and contract hire. You pay a low deposit and monthly instalments which cover the van’s depreciation. At then end of the contract, though, you have the option of paying the forecast value of the van - the Guaranteed Minimum Future Value (GMFV) - and keeping it or simply giving it back to the dealer.
As with contract hire, there’s usually a mileage limit, and you don’t own the vehicle until the GMFV has been paid. Monthly payments tend to be lower with PCP than with other options, since there’s a relatively big final payment to be made at the end should you decide to keep the van.
The big advantage of PCP is its flexibility. It keeps your payments low, and you have the option to hand back the van and walk away at the end of the deal.
If your business is VAT-registered, taking out a finance lease can be an attractive option, as it allows you to reclaim up to half of the VAT payments. You pay a deposit - usually around three months' payments - and monthly instalments over the period of the lease. Opting to pay a larger deposit can reduce the monthly payment amount.
The van remains the property of the leasing company, and at the end of the agreement you make a ‘balloon’ payment to pay off its investment. The leasing company then sells the vehicle; if the price it gets is more than the balloon payment, you’ll get the difference back; if it’s less, you might have to pay more.
As a business this option gives you the security of fixed payments, but the leasing company has to make a profit, so you’ll end up paying more than the price of buying the van outright, though probably less than the interest payments on a loan.
A loan may be seen as the traditional way of financing a vehicle, but if you have a strong credit record, it has a lot to commend it. You’ll still need to find a deposit - typically around 10 per cent - and the monthly payments may be higher than with other methods. But on the other hand, the vehicle is always in your name, so you’re free to sell it at any time should you need to do so. As with buying outright, you’ll still be responsible for paying the maintenance costs, so keep these in mind.
Obviously, interest rates on loans vary, so it’s worth shopping around. Try your bank to see what they can offer, but also check out manufacturer offers, which can sometimes have attractive rates.