Managing down end-of-lease charges
Ever got a nasty surprise at the end of a lease period with a letter saying you owe the leasing company more money for the car you've just returned?
Most companies have experienced this at one time or another, but there are simple ways of ensuring that you avoid such 'end-of-lease' charges. Tim Bowden, Head of Operations at Hitachi Capital Vehicle Solutions, explains why these charges exist and what businesses can do to reduce their exposure to them.
Why are end-of-lease charges applied?
A large component of the monthly leasing cost is calculated based on the depreciation of the vehicle. The forecast value (known as residual value) of the vehicle at the end of the contract hire period determines the amount of depreciation from the new vehicle price. Crucially, the residual value is calculated based on the vehicle being returned in the appropriate condition for its age and mileage at the end of the lease period. In much the same way as a private sale, a car in poor condition won't achieve its true market value. It's important to understand that leasing companies carry the risk in any difference between their forecast residual value and the current market value.
End-of-lease charges therefore exist to reflect only the loss in sale proceeds as a result of the vehicle being returned in a condition that affects the value achieved. Reputable leasing companies adhere to the BVRLA "fair wear and tear policy". This is an industry standard which identifies the condition that a vehicle should be returned in reflecting the age and mileage of the vehicle. Your leasing provider will be able to provide you with a copy of the policy.
How are end-of-lease charges calculated?
Hitachi Capital uses two independent companies to produce end-of-lease inspection reports. One covers cars and small vans; the other deals with specialist vehicles and lorries. Their findings dictate the level of end-of-lease charges. There is an expectation that cars will come back without major dents and scratches, whereas there is a little more leeway for commercial vehicles. Some additional wear and tear is to be expected on vans and lorries.
Follow Hitachi Capital's seven simple steps to managing down end-of-lease charges to ensure you are not caught out by unexpected charges.
Seven steps to managing down end-of-lease charges
1. Maintain the vehicle in a clean and tidy condition. This will make the extent of any damage clearer to identify and enable suitable repair to be undertaken during the course of the contract
2. Consider vehicle colour when placing your order. Repairs to special option colours can be more costly to repair, whilst unusual colours, particularly shades of green and brown, are much harder to match, so it's worth considering this when you take out a contract
3. Maintain the vehicle throughout the life of the contract. Ensure your company car policy places responsibility for weekly oil level, tyre pressure and bodywork checks with the driver
4. Ensure the driver reports any incidents, however minor the damage may look. Take any third party details and get the damage checked out by a bodyshop before the vehicle is returned
5. Keep on top of minor damage. Remember that a chip in a windscreen will crack eventually and it's cheaper to get a smart repair done immediately rather than wait until you need a whole new windscreen and have to pay an excess. The same applies to small scratches, which can turn into big rusty holes if you leave them to deteriorate
6. Talk regularly to your contract hire company during the course of the contract. It's worth knowing the company's policy on repairs, as it might be cheaper to get dents and scratches repaired by your local body shop - as long as their work is to an acceptable standard. Recharges can arise due to the poor quality of a previous repair
7. Inspect vehicles before you return them. You have the right to get an inspection carried out by an independent qualified engineer, who will use BVRLA guidelines on fair wear and tear. This is worth considering around five weeks before you are due to hand the vehicle back, especially if you are uncertain if the damage on a vehicle will incur charges.
Further reading
All reputable leasing companies adhere to the BVRLA "fair wear and tear policy". Visit the BVRLA website to find out more.
