Types of rate
The rate of interest is agreed and fixed for the life of the loan. Any changes to interest rates across the market will not effect the amount payable on these agreements.
The rate of interest is agreed and set at an amount above a base rate normally LIBOR (London Interbank Offer Rate) or sometimes FHBR (Finance House Base Rate).
A change to the LIBOR base rate (which fluctuates similarly to the Bank Of England Base Rate) results in a change to the interest rate payable by the customer. Unlike a variable rate mortgage on a house the monthly payment does not usually change since variable rate motor finance is normally arranged as a ‘Balance Payments’ plan. This means monthly payments remain balanced throughout the agreement for simplicity. Any variations in the base rate over the term of the agreement are dealt with at the end of the agreement by either lengthening or shortening it.
Types of funding
Hire Purchase (HP)/Lease Purchase/Conditional Sale
Differing names used to describe what are broadly speaking the same product depending on the type of borrower.
The customer places a deposit down and the balance is repaid across an agreed term which is usually between 2 – 5 years. The minimum deposit required by the lender is subject to customer status, whilst there is no fixed minimum, 10% deposit is a safe rule of thumb.
Hire or Lease Purchase with a Balloon
With this product a ‘balloon’ amount is agreed at the start of the loan by the finance company. Essentially a large proportion of the value of the car is offset for repayment until the end of the loan, a typical example would be 50% over 3 years.
This concept recognises that whilst most cars are depreciating assets they will have a significant value at the end of the agreement. The end value of the car enables repayment of the balloon when it is due. Finance companies now tend to set balloon amounts that will comfortably be covered by the end value of the car.
Whether the car is sold privately, part exchanged or sold to a dealer the sale proceeds are designed to cover the balloon amount and, ideally, leave the customer with equity for a forward deposit on their next car. There is also the option to pay the balloon amount and keep the car. It may also be possible, subject to status, to refinance the balloon amount and keep the car.
Personal Contract Purchase (PCP)
PCP is a variation on the Hire Purchase with a Balloon product. With a PCP the future value of the vehicle is guaranteed.
The minimum Guaranteed Future Value (GFV) is set to the same amount as the Balloon figure and, in doing so, affords the user the opportunity to just hand the car back to the finance company come the end of the agreement whatever happens to car values in the future. Naturally, the car needs to be in fair condition and the mileage needs to be the same as agreed at the start of the agreement or penalties will need to be paid. These mileage penalties are clearly laid out at the start of the agreement and are generally designed to be fair to both parties.
The customer does not have to take up the offered GFV unless they see advantage in doing so and is therefore able to sell the car privately or to a dealer, part exchange, keep the car or refinance as he or she chooses should the car be worth more than the GFV.
The age criteria for PCP is generally stricter than for HP With a Balloon.
Normally only available on new vehicles to business users allthough some used vehicles that remain VAT qualifying can be funded on Finance Lease.
Finance Leasing uses VAT legislation to its advantage so unless the used vehicle is VAT qualifying there is little value to the Finance Lease product. With leasing, the vehicle effectively gets sold to the finance company who then ‘rent’ it back to you the customer. Legislation says that since the finance companies involvement is 100% for commercial reasons they can recover the VAT when they buy the vehicle. This means that less needs funding – with benefits to interest and repayment charges. The ‘rentals’ you pay do however attract VAT of which normally 50% can be reclaimed. The essential point to remember is that this is a non-ownership product so you are not buying the vehicle but renting it, although you do still carry the risk of the vehicle’s future residual value.
Contract Hire is only available on new vehicles and like Finance lease it takes advantage of VAT legislation that allows the finance companies to reclaim the VAT proportion of the vehicle before renting the vehicle to the consumer.
Unlike Finance Lease with Contract Hire the consumer carries no risk at the end of the agreement as the future value is the responsibility of the finance company arranging the contract hire. Contract Hire is basically a long term rental agreement for new cars normally over a 2 or 3 year period.
Company Car Taxation
Considering taking the cash option instead of a company car?
Harbour Cars is here to help you make an informed decision when considering opting out of a company car and taking the cash option from your company in order to buy the car of your choice and we want to make the decision making process as hassle-free as possible for you.
With the changes in company car taxation that have taken place since April 2002 most of our customers have exercised their choice to take cash instead of a company car.
Whilst there may be personal considerations to be taken into account, it is possible to work out the exact financial implications.
When making comparisons it is not just a case of subtracting tax off the amount your employer gives you each month. To work out the true value of your employer’s cash allowance 3 factors must be taken into account:
1. What is the value of your cash allowance after tax?
Take the Gross amount of money your employer will pay you extra if you do not take a company car and deduct the tax you would pay on this income to get a net figure.
2. What would the ‘free’ company car cost you in tax?
Add to the net cash amount the amount of tax you will not pay by taking a company car.
3. What is the value to you of offsetting the business use of your own car to tax?
Finally you need to add the tax relief you get for using your own car for work.
Approved Mileage Allowance Payments (AMAP) rates allow employers to pay employees a set amount per mile without the employee incurring NI or income tax liabilities. Your employer can pay you up to 45p per mile for the first 10,000 miles and 25p per mile for all subsequent mileage without you incurring tax.
However, if your employer does not pay you any pence per mile for using your own car then you can reclaim income tax relief based on either the 45p or 25p rates. E.g. If your employer pays you nothing per mile and you are a 40% tax payer doing 8000 business miles in your own car you can reclaim £1440 cash back from the taxman.(8000m x 0.45 = £3600 x 40%=£1440).
These 3 factors allow you to calculate your true monthly spending power if you take the cash option instead of a company car.