Why should I use finance for our company cars?

It is a perfectly valid question and as a general rule you don’t borrow someone else’s money and pay them interest when you have your own money sitting in the bank. Certainly banks seem at their happiest when they are lending money to those who don’t need and asking for it back if they do.

To some extent this is easy to understand; not so very long ago cars didn’t have the three year warranty they have today, so companies were used to having vehicles on their fleet that were outside the warranty period and liked the idea of being able to continue running a vehicle after they had finished paying for it.

Nowadays most cars come with a three year warranty and with modern cars being so prone to electronic problems; companies are loathed to keep them once the warranty has expired. Which begs the question, what is the benefit of owning company cars, if you are going to sell them as soon as you have finished paying for them?

If the company uses its cash to purchase the car, what would it be worth at the end 3 years? It’s a question to which nobody has the answer but with the uncertainties that there are in the world, why gamble when you can let someone else take the gamble on future values?

Probably if a company were to gamble on future values then buying smaller diesel cars that have a strong second hand market such as the Volkswagen Golf or the Audi A3, would probably be the less risky option. They are not generally discounted heavily because they hold a strong position in the market. Large discounts on a car can be a warning sign that it may be a difficult car to sell when second hand.

Second hand cars can often be difficult and time consuming to sell. Furthermore at the time of disposal the vehicles are usually outside the warranty, so you always run the risk that an engine is going to blow up or some other fault develops and the purchaser returns it to you claiming it was faulty when it was sold. You can dispose of vehicles through the trade but that carries with it its own financial penalties; the significantly lower price you have to accept for a car when you sell it to the trade.

Higher mileage cars are certainly more difficult to sell, even after taking into account that they are cheaper to buy. Prospective purchasers do appear to worry too much about the mileage of a car. Particularly when you consider that higher mileage cars have usually been used more on motorways rather that around town, which is know for being less of a strain on many of a vehicle’s components. Perhaps one reason could be that they are considering extending the warranty and are aware that 100,000 miles is the cut off point for most manufacturers.

If a company is concerned about taking a three year leasing contract because they feel circumstances may change, they could consider taking a two year term, or even eighteen month or one year contracts are available. If however you tried to finance the full cost of a vehicle over eighteen months or two years, you would find it very expensive in terms of monthly payments. Overall hire purchase exposes a company to uncertainties such as the risk of deteriorating residuals and generally ties up more money and resources. Hence the significant rise in companies opting for contract hire as a more cost effective alternative.