Why Lease Rates Can Vary So Much On The Same Vehicle Pt 1

Tuesday, 26. July 2011

Hi, Graham Hill here, thank you so much for visiting my blog, I hope you learn a lot and as a result end up driving a great car. In order to do so you can get all the information you need by buying my book, An Insider Guide To Car Finance or use me to finance your next car. Happy driving.

Insight Part 1: I’m often asked why there can be some incredible differences between the contract hire rental rates quoted by different companies advertising on the Internet. There is no simple answer to this question, in some respects it is not dissimilar to the answer that an insurance company would give as to why insurance premiums can be so vastly different between insurers on the same car with the same driver. If anything it is a little more complex for the contract hire company because they have to buy the goods after negotiating a number of discounts and bonuses, buy the money that they will in turn use to buy the car, assess the level of risk that they will apply to each applicant in order to decide if they will take them on as a client then put a value on that risk, calculate their costs for administering the contract and finally estimate a future value on the car when it is returned based on the mileage of the car.

Quite a complex calculation which then has the broker commission factored into the lease rate. The problem is often not the amount that the broker is looking to earn but a component part of the calculation.

Let’s take a company that is no longer involved in leasing, Bank of Scotland Contract Hire (not sure if that’s what they called themselves at the time but it was BoS).

They found a strong niche in Mercedes cars, negotiated some very strong terms with Mercedes Benz then found the best auction sites and days of the week to sell the end of lease cars in order to maximise returns. Mercedes generally offered a high level of customer support so the admin time spent on customer complaints were minimal.

Do you see the picture developing? As they sold more vehicles the discounts and bonuses increased making them even more competitive. At one stage they were the biggest buyer of Mercedes in the world and even though their fleet size was comparatively small they were offering better rates than all the big leasing companies and even MB Finance.

Now at the time not all brokers could use BoS so some brokers quoting other’s rates were anything up to £100 + VAT different per month. It wasn’t brokers trying to rip off customers or leasing companies profiteering it was simply down to the circumstances within BoS compared to all other leasing companies at the time.

In a similar way I worked with a small contract hire company many years ago called Elton Vehicle Contracts, they were the contract hire arm of a group of dealers who were one of the biggest Toyota dealers in the UK. As a result no other contract hire company could touch them when it came to Toyotas.

They could buy the cars very cheaply as they had very special terms as a dealer group. It also meant that all used Toyotas, at the end of their agreements, could be sold for retail money through their dealers rather than sub trade through auctions.

They gained at both ends which meant that even the biggest contract hire companies couldn’t get close to the rates quoted by Elton, who eventually were bought by Abbey National and became First National Vehicle Contracts. So you see whilst there are those that will try to rip you off by providing unrealistic rates, in many instances it is simply down to the terms and assessments by the individual leasing companies.

The problem is that in order to cover their bottoms the leasing companies that get it wrong or purposely attract customers with low headline rates, will have many terms in the agreement that help them to recover any losses as well as impose very high end of contract refurbishment charges.

So there you have it, a little look into the workings of contract hire and why some companies charge considerably more than others. By Graham Hill

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