Error parsing XSLT file: \xslt\FacebookOpenGraph.xslt ON THE MONEY: Rising rates? Open the book on contract hire
BusinessCar magazine website email Awards mobile

The start point for the best source of fleet information

ON THE MONEY: Rising rates? Open the book on contract hire

Date: 12 June 2008

Rupert Saunders

One of the curious anomalies of financing your business cars on contract hire is that you rarely get to learn what interest rates you are being charged. As a result, this must be about the only area of business these days where you don't know what your loan is costing you.

The focus of all contract hire quotations is on monthly rentals; a no-risk single payment to cover all costs including administration fees, depreciation, excise duty, service and maintenance (in many cases) plus, of course, interest on the money used to fund the car in the first place.

There is a valid argument for this. After all, the monthly rental is the only cost to your company and it is the rental that you claim as a business expense; so why do you need to know how it is broken down? As long as the rental is competitive, what does it matter?

But how would you feel if you learned that your contract hire provider is not able to borrow at the most competitive commercial rates and you were paying higher monthly rentals as a result? In the present financial climate, that's increasingly likely.

"Vehicle finance suppliers who are most heavily exposed to the turmoil in the credit markets have seen their cost of funds shoot up in recent weeks," explained Mark Sinclair, director of Alphabet. "This is being reflected in their lease rentals. Variations in quoted interest rates on lease deals have widened to almost unprecedented levels."

As Sinclair points out, the rate at which finance providers can borrow money from the wholesale markets is dependent on both the commercial strategy of the lender and the credit rating of the borrower. He says liquidity issues and high inter-bank lending rates may have a significant impact on rental quotations.

"Interest rates may, at the moment, vary by 2% between quotes," he maintains while pointing out that his own parent company, BMW Financial Services, has a strong credit rating and is not exposed to any of the losses in the US sub-prime market.

So, would you be better off placing your leasing business with a car company or a bank? I asked Rob Bailey, head of Lombard Vehicle Management which is owned by RBS.

"In the current credit situation leasing providers who are bank-owned have an advantage as banks get the cheapest funding available," he claims. "It is also worth remembering that banks like us lend to other parties in the fleet business, including vehicle manufacturers."

Of course, if you have just begun a three-year, fixed rate deal on all your business cars then none of this is going to affect you. But, if you have noticed your rentals have started to creep up recently, then it might be worth asking your leasing provider why.

If you are big enough, you could even press for an 'open book policy' which would give you the right to look at all the elements of the monthly rental - only that way can you discover what the interest charges are.



Share


Subscribe