4th December 2020
Leasing vs buying trucks: which should YOU choose?
If you operate a fleet of trucks – or just one truck – you’re familiar with the associated costs and liabilities, the impact on your balance sheet, and the value the vehicles bring to your business.
Maybe you bought your trucks outright. Perhaps they were acquired through hire purchase. Or do you lease your vehicles?
Which is best? Buying, leasing or hire purchase.
There are pros and cons to them all. But do you have a good knowledge of what’s involved in all cases, and how they compare to one another?
If you’re looking to add a vehicle to your fleet, or if you’re a start-up business and planning to acquire your first truck, we can offer a little bit of insight into the pros and cons of buying and leasing.
The UK’s Vehicle-Leasing Industry is 3rd Largest in the World
In the past, outright purchase of an asset has usually been the first choice, with leasing as a fallback option for those who don’t have the available cash. Things are changing, though, and equipment hire, including truck leasing, is gaining traction as a viable option. Not just a ‘Plan B’.
In a 2020 report
by BVRLA (British Vehicle Renting and Leasing Association), in association with Motor Transport magazine, it was revealed that more than half of all trucks and vans in the UK are leased, with less than 45% owned outright by operators. Approximately 25% of the leased vehicles are on contract hire (for at least 12 months) with a maintenance package. This trend is reflected in the fact that repair and maintenance is the number one factor in operators’ choice of lessor.
When you purchase a new truck, the initial cash outlay is huge. There’s a lot of capital tied up in this asset. However, 100% of the VAT can be reclaimed, and over the first few years, depreciation can be offset against taxable profits.
But it’s yours. You can do as many miles as you like, make adaptations, and add branded livery. Bumps and scratches are fixed – or not fixed – at your discretion.
The ongoing issue of maintenance requires either in-house mechanics, a dedicated workshop, and the necessary equipment; alternatively, expensive outsourcing. And the long-term commitment of buying a truck doesn’t allow for regular upgrades.
For some, the shackles of ownership are too heavy.
To others, the freedom of ownership is priceless.
Leasing a lorry (contract hire)
The biggest difference with a lease, of course, is that you don’t own the vehicle.
With a lease, the costs are steady and predictable, accounted as an operating expense. You know exactly what you’ll be paying every month, and all included items in the lease, such as road tax, MOT tests, and maintenance packages, are evenly spread. VAT is also spread out across monthly payments.
You have exclusive use of a vehicle and the potential to grow your business – without tying up your capital.
At the end of the lease period, you might choose to take out another term’s lease on the same truck – or a newer one. Alternatively, the truck can be handed back to the lessor. You’ll be charged a fee for any mileage above the agreed maximum, or for damage to the truck.
Other conditions will be written into a lease. A certain level of insurance could be required. And you might not be permitted to add branding to the truck.
According to polls (BVRLA/Motor Transport), a maintenance and repair package, which often includes breakdown support, is one of the leading factors when it comes to choosing the lease option – and the number-one consideration when looking for a lease contract.
With such a wide range of leases available, you should be able to find one that’s just right for your business. If a long-term lease (say, three years) would suit you best, the monthly instalments will be lower. If you need your truck for just a few months, the total amount payable will be comparatively high, but compared to buying a truck and reselling after depreciation, a short lease is an excellent option.
If you’re looking to add vehicles to a fleet of trucks that you own, and you have the maintenance infrastructure in place, you might consider keeping a repair and maintenance package to a minimum. On the other hand, if your business is not already geared up for maintaining a lorry, an all-inclusive maintenance package could be perfect for your needs.
For many operators in the UK, the restriction of working with leased vehicles is a small price to pay for the convenience and flexibility that they provide.
What is hire purchase?
Hire purchase is a way of buying a truck over a set period of time. A deposit is paid upfront, as well as the whole of the VAT (which can be reclaimed), followed by monthly payments until the end of the term. At this point, you’ll own the truck.
The truck belongs to the lessor until the final instalment is paid, but all the responsibilities of ownership belong to you from the outset. You can, however, account for your truck as a depreciating asset. The interest element of your payments should be offset against taxable profit.
Some hire purchase providers will offer a seasonal payment schedule, which can be very handy if your company is busier at certain times of the year than at others. Another cashflow perk, in addition to the advantage of spread payments.
Should I buy or lease a lorry?
Which is the better option for your business? Here are a few considerations:
• Do you have enough money available to buy a truck?
• If you were to buy a truck outright, would other investments be inhibited by tying up that capital?
• If you were to buy a truck outright, would you have the financial means of running and maintaining it? Or would finances be tight?
How long do you want the truck for?
• Do you plan on having the truck for many years or only a few months?
• Are you wanting to acquire an asset?
• Are you unsure about how long you’ll need the truck?
• How many miles will the truck be driven per week/month/year?
Would you like the option of changing your truck?
• Are you planning on keeping the same truck indefinitely?
• Would you like the option of a regular upgrade to a newer model?
• Do you think that up-to-date vehicles are more appealing to potential talent?
If you don’t have the available cash, but your long-term goal is to own your vehicle, hire purchase is for you. All the freedom, independence, ties, and liabilities of owning a vehicle will be yours from the outset. Over the total period of your hire purchase, the truck will cost you more than it would do if you’d bought it outright, but the option of monthly instalments makes owning the truck possible.
If you plan on frequently upgrading your truck, a lease is for you. At the end of a lease, you give the truck back, pay any outstanding charges, and walk away. Decide how long a lease you want, and work out how many miles you think your lorry will do. Think about the logistics and costs of maintenance, and decide what level of maintenance you’d like.
If you have enough cash to buy your truck and maintain it, this might be what you opt for. On the other hand, you might decide, as many operators are doing, that leasing is the best option for you.