In the world of business, leasing is a common practice when it comes to acquiring assets. Two popular types of leases are contract hire and operating lease. Although they may seem similar, there are significant differences between the two. Understanding these differences can help you make the right decision for your company’s financial needs.
Contract hire is a long-term lease agreement which typically lasts for two to four years. It is common in the automotive industry where companies lease vehicles from dealerships. The leasing company covers the cost of maintenance, insurance, and road tax. The lessee pays a fixed monthly fee for the use of the vehicle.
One of the biggest advantages of contract hire is that it can help companies to reduce their upfront costs. Instead of buying a vehicle outright, they can lease it for a fraction of the purchase price. This is particularly useful for companies that require a fleet of vehicles for their operations.
Another benefit of contract hire is that it allows companies to upgrade their vehicles regularly. When the lease term ends, they can return the vehicle and lease a newer model. This means they can always have access to the latest technology and features without having to buy a new vehicle each time.
An operating lease is a short-term lease which typically lasts for one year or less. It is commonly used for equipment and machinery leasing. Unlike contract hire, the lessee is responsible for the maintenance and insurance costs of the leased asset.
Operating leases are beneficial for companies that need equipment for a short period. For example, a construction company may need to lease a crane for a few months to complete a project. An operating lease allows them to do so without having to commit to a long-term lease agreement.
Another benefit of operating leases is that they can help companies to conserve their cash flow. Instead of buying equipment outright, they can lease it for a fraction of the purchase price. This means they can allocate their funds to other areas of their business.
In summary, contract hire and operating lease are two popular types of leasing agreements. Contract hire is a long-term lease which is commonly used in the automotive industry, while operating lease is a short-term lease used for equipment and machinery. The main difference between the two is that contract hire includes the cost of maintenance and insurance, while operating lease does not. Ultimately, the choice between the two will depend on your company’s financial needs and the specific asset you want to lease.