If you are in need of a new van, either for your small business or for personal use, there are a range of finance options available to you. Purchasing a van is a big decision, and not everyone has the financial capacity to buy a new vehicle outright. Splitting the cost of the purchase over a number of months is often more manageable, and when it comes to van finance, there are a few different options to consider.
If you are buying a van for business use, it can be beneficial to pay the cost monthly rather than in one lump sum to help with cash flow and budgeting. Depending on the method of van finance you choose, it can provide various tax benefits to your business.
A few years ago, buying a vehicle outright was always considered the best option, and it was easy to head to the local van dealership and buy your new van with a pile of cash. Now we are in a position where there are a number of options for purchasing a new van, which is designed to suit every budget and circumstance. One of the most common options for van finance is hire purchase; this guide looks in more detail at what van hire purchase is, how it works and the advantages and disadvantages.
What is van hire purchase?
Van hire purchase is sometimes known as a lease purchase, and it combines the elements of a van lease and a van loan into one easy to manage agreement. It is an increasingly popular method for those purchasing a new van for either business or personal use.
Van hire purchase can often be arranged either through your van dealership or through various lenders and brokers. You and your lender will agree on an initial deposit amount which is to be paid upfront, and then the remaining balance is paid off in monthly instalments. The monthly cost of a van hire purchase agreement is dependent on the value of the van you are buying, the size of the deposit paid, the interest rate and length of the agreement.
Usually, van hire purchase contracts are available for anywhere between 24 to 60 months, and interest rates can vary greatly depending on the lender. Van hire purchase agreements offer a considerable amount of flexibility, allowing you to either spread the cost over an extended period of time and pay a small deposit, or pay a high upfront deposit and pay the balance off quickly.
This method of van finance works in a very similar way to a van loan or personal loan as you are making monthly repayments towards the cost of the van. However, there are a few big differences that you should be aware of before making any decisions. During the duration of a van hire purchase agreement, you will not be the legal owner of the vehicle and are essentially just hiring the van for the agreed period.
Even though the vehicle will be in your possession, the lender or finance company will be the legal owner of the van until the end of the agreement. During this time, you will not be able to sell the van or make any major changes to it without the lender’s permission, and if the monthly repayments are not kept up, then the van could be repossessed to cover the cost of the remaining finance. At the end of the agreement and once the final payment has been made and the full value of the van has been paid, you will then become the registered owner of the van and will own it outright.
Individuals and businesses with a lower credit rating may have more luck in being approved for a van hire purchase agreement than a loan as the vehicle is used as security. The lender will see you as less of a risk as they have the right to repossess the van to repay the funds if necessary. Interest rates on van hire purchase can vary greatly between lenders and will also be dependent on your credit score and financial situation. It is vital to shop around and properly research the various deals available as they change regularly.
There is a range of different options available for van finance in addition to hire purchase. Consider all the options before deciding which best suits your current situation.
How does van hire purchase work?
If you’ve got your sights set on a new van and chosen the model you want, then at this stage you should know its value and therefore the amount you want to borrow. Most hire purchase providers will ask for a deposit of at least 10% of the van price, although many will give you the option to pay a higher deposit to reduce the monthly repayments. If you are buying a new van, many manufacturers will run promotions where they will pay all or a proportion of the deposit if you take out their finance deal.
Once the deposit amount has been agreed, you will also decide on a contract length to agree how long you will be making the payments for. Usually, this is anywhere between one to five years, and the longer you pay, the lower the monthly instalments will be. However, the amount of interest you pay will increase.
The monthly repayments are fixed for the duration of the van hire purchase agreement, and typical APR interest rates are between 4% and 8%. Some dealers will offer 0% finance deals, but these usually have other terms and conditions such as higher deposits. If you fail to make the monthly repayments for any reason, the finance company has the right to repossess and sell the van to cover the loan amount.
At the end of the hire purchase agreement and once all the repayments have been made, you will need to pay a final ‘option to purchase’ fee to own the van outright. This typically costs between £100 and £200 and covers the cost of transferring the ownership of the van from the finance company into your name.
Throughout the agreement period, it is vital to remember that the van is owned by the finance company, meaning you have no legal rights to the vehicle and cannot sell it. Some finance companies may agree to let you sell the van if you ask, but they will usually expect you to use the proceeds from the sale to settle the finance agreement.
There is another option to end a van hire purchase agreement early, it is known as voluntary termination and is available thanks to the Consumer Credit Act. This lets you terminate a hire purchase agreement before the agreed date if you have repaid at least 50% of the total loan amount.
You will be required to return the van to the finance provider and end the agreement early. The van will need to be in good condition in order to return it. Otherwise, you may be required to pay additional repair fees. If you end up in a position where you can’t afford the repayments anymore and need to save some cash, then this is an excellent way of getting out of the agreement before the end date.
The ‘option to purchase’ fee should be made clear to you at the time of signing the contract, however, if it isn’t clear then make sure to ask before signing anything to avoid unexpected costs down the road.
Who can get a van hire purchase agreement?
If you are looking to purchase a van for your self employed business or for personal use and don’t have the funds available to purchase it outright, then a van hire purchase agreement could be a great option. For businesses, van hire purchase is an excellent way of keeping cash in the business and spreading the cost as opposed to paying one large lump sum.
Van hire purchase agreements are also a great option for those that are unlikely to be approved for a loan or other finance because of a poor credit history. Finance providers are more lenient on whom they will lend to with hire purchase as the van is used as security and can be repossessed and used to settle the loan if necessary.
Anyone over the age of 18 will be considered for a van hire purchase agreement, although you will need to provide proof of identification and details of your income. You will need to be able to fund the deposit upfront, and your income must be enough to cover the monthly repayments.
It isn’t necessary to have a full driving licence to obtain van hire purchase; this is only required if you plan on driving the vehicle alone. As a business applying for van hire purchase, you will often need to provide details of the business income for the last few months to prove the monthly repayments can be kept up.
Remember that there are plenty of other costs involved with running a van in addition to the monthly repayments. Ensure you can afford the repayments as well as insurance, tax and fuel before purchasing a new van.
Advantages of van hire purchase
There are a huge number of options out there for funding the purchase of a new van, and it is crucial to fully understand the advantages and disadvantages of van hire purchase before deciding if it is the right option for your current situation. The benefits of van hire purchase are:
- Monthly repayments are relatively low compared with other options
- Allows you to spread the cost into small manageable monthly instalments over a number of years
- Contract lengths are flexible; you can have an agreement for anything between one and five years depending on what works best for you
- Deposits are low compared with some other options, usually around 10% of the value of the van
- Monthly instalments will remain the same throughout the agreement as interest rates are fixed for the duration
- Access to a new van that you may not usually be able to afford outright
- Added protection on the van as if any issues arise the finance company will be liable
- Available to those with a poor credit rating that might not usually be accepted for a credit agreement
- At the end of the contract, you will be the legal owner of the van
- You have the option to end the deal early and buy out the van by paying off the remaining loan amount
- Some manufacturers may offer a contribution towards the deposit amount
- If using van hire purchase for business, you can claim up to 100% VAT back on the monthly repayments if you are VAT registered
- The monthly instalments can be claimed as a business expense when filing your tax return.
Disadvantages of van hire purchase
The cons of van hire purchase are:
- Some van hire purchase agreements include mileage limits, which if exceeded can result in additional fees
- If you choose a manufacturer hire purchase agreement, you can become tied to that one brand
- If you don’t keep up monthly repayments, your van could be repossessed
- You will not be the registered owner of the van until the end of the agreement, so you cannot sell it or modify it during this time
- At the end of the contract, the van may be five years old and need replacing
- Interest rates can be higher than those on standard van loans
- If you fail to keep up with repayments, it will negatively impact your credit score.
If you decide to end a van hire purchase agreement before the set end date, make sure you get the termination in writing. This will protect you in case the finance company later claims that you defaulted on the payments.
Alternatives to van hire purchase
There are a number of options for spreading the cost of buying a new van, and before deciding if van hire purchase is the best choice for you, be sure to consider all the alternatives. It is essential to properly compare and understand the various options in order to know which best suits your financial situation. Some other options to van hire purchase are:
Similar to van hire purchase agreements, contract hire requires an initial upfront deposit and monthly repayments with added interest, the main difference is at the end of the contract you will not become the legal owner of the vehicle. At the end of a contract hire agreement, you simply return the van to the lender and are free to take out a new contract for another van.
Contract hire is an excellent option for those who need to change vehicles fairly often and have no interest in owning them outright. Monthly instalments are usually quite low, and the overall cost of a contract hire finance agreement is dependent on the value of the van, mileage limits and length of deal.
If you want to own your van outright from the beginning but can’t afford to pay for it all in one lump sum, then a van loan could be for you. Similarly to van hire purchase agreements, you pay a deposit upfront and then monthly repayments until the value of van plus interest is paid off.
The main difference is that you are borrowing the money to purchase the van outright instead and then paying that back over a period of time, as opposed to just paying off the value of the van over the duration. Some lenders will offer secured van loans which use the vehicle as collateral in case repayments are not made, while others may offer unsecured loans to those with a good credit rating.
Annual Investment Allowance
If you are purchasing a new van for business use, it can be worth using your Annual Investment Allowance (AIA). This is the amount that HM Revenue and Customs allow you to deduct from your tax bill for business investments. Currently, the AIA limit is £200,000, and it includes vans but not cars. Some business owners will use this allowance to buy a van outright, but it is also possible to put your monthly finance repayments towards the allowance while still splitting the cost across multiple tax years.
If you have an excellent credit rating then credit cards when used sensibly are a good option for splitting the cost of any substantial purchase, including a new van for either business or personal use. There are various types of credit cards out there with different features and benefits, and if you shop around for the best deal, you can end up getting some good deals and low-interest and 0% purchase rates.
With a credit card you also get added protection on your purchase, and the ability to stagger the payments however you like.
To benefit from the added protection that comes with using a credit card, you only need to pay at least £100 of the van on the card. This is a great way to get all the credit card protection benefits and also splitting the cost of the van over another method more suitable for you.