Why Are 2 Year Contract Hire Rates So High?

Monday, 10. August 2009

I have just quoted a customer on a BMW X5, similar to the last car that he contract hired 2 years ago. On his old car the difference between the 2 year and 3 year rates was about £15 per month (2 years more expensive). However, the difference now is £134.53 + VAT per month! Why should this be? 2 years ago it could be argued that there was more discount/bonus in the car virtually wiping out the first year’s depreciation. 2 year old cars may have had a greater resale desirability than 3 year old cars on pro-rata mileage. But £135 + VAT per month? I don’t think so! Or maybe I’m to blame. You see I have explained to people in my book and in articles that when you take out a 3 year contract you should also get a quote over 2 years, then if you hand the car back after say 2 years you should only have the difference in monthly cost times 26 months to pay when you hand the car back rather than a proportion of monthly rentals outstanding. Let me illustrate. Lets say over 2 years the monthly cost was £320 but over 3 years it was £300. After 24 months of a 3 year agreement you have paid 26 (3+23) x £300. However, had you only taken the car over 24 months in the first place you would have paid 26 (3+23) x £320, then handed the car back. So you should have paid 26 x £320 instead of 26 x £300 = a shortfall of £520. However, the normal rules of termination show that you will pay the outstanding rental (12 x £300 = £3,600) less a rebate for early return of the car, sometimes around 50%. This would still make the payment £1,800 compared to what I believe the figure should be, ie. £520. To make matters worse some funders are now offering as little as 5% rebate. In this example you would be expected to pay £3,600 – 5% = £3,420, which is ridiculous compared to what you would have paid had you contracted to take the car over 2 years. This would be a clear case of a penalty being charged which is illegal and could have been presented to the Financial Ombudsman Service for a ruling. To avoid this situation I feel that some funders may be providing exceptionally high 2 year rates in order to encourage you to take the car over 3 years but also give them more justification to rip you off should you early terminate your contract hire/PCH car. You should still ask for both quotes and be very wary of the funders who quote very big differences between 2 and 3 year rates. Oh and use a professional broker who can help you out of a fix should you find yourself in trouble. By Graham Hill