Fleet News

Fleet funding: Leasing contracts

At a glance
  • Consider the implications of the end of a leasing contract before you sign it.
  • Not considering the lead-in time of a new contract could see you overrun the existing one.
  • Extending the contract could see drivers running over their vehicles’ mileage allowance.
  • Inspect vehicles for damage before you return them – you may want to get excess damage repaired first.
  • Beware of the charges for early termination. Make sure you know what your supplier will do should that happen.

    CONTROLLING costs is one of the most vital areas of fleet.

    With so many variables in virtually all areas of the job, having as firm an idea as possible of what will cost what –and when – is one of the cornerstone responsibilities of the fleet manager.

    Some are relatively simple to plan for but, as with anything in life, there are always hidden costs lurking around the corner, waiting to jump out and make the fleet manager’s life a nightmare, and budget immaterial.

    An area that many are caught out in is the changeover between one leasing contract and another. A contract is signed, three years go by, and shortly before it expires you start thinking about another one. But these are dangerous times, with financial pitfalls waiting to trip you up.

    Transitions between contracts are not always smooth and quick, and unexpected delays or occurrences can cost big money.

    There are four areas that fleet managers should think about, according to Tim Hudson, commercial director of Leaseplan. And not just at changeover time, but years in advance at the inception of the contract.

    CONTRACT EXTENSION

    CONTRACTS are signed based on vehicles being kept for a specific time period and mileage allowance – typically three years and 60,000 miles.

    But suppose there is a delay on the introduction of the new contract and the arrival of the new cars?

    ‘If you carry on over that agreed period it may be the case that you are paying too much,’ Mr Hudson says.

    ‘It’s always worth a client checking with the leasing company that they are not paying more than they should.

    ‘Make sure that prior to the end of the contract you have a look at the potential replacement vehicles – look at the lead time to make sure it isn’t too extensive. If it’s long, speak to your leasing company to either extend the contract formally or understand the informal extension consequences, which could be considerable.’

    EXCESS MILEAGE

    ‘If your contract does go into informal extension – which could be anything up to six months – vehicles could go over the agreed mileage,’ Mr Hudson says.

    ‘If your contract is for 36 months and 60,000 miles you could end up keeping the vehicle for 42 months, but you still have that 60,000-mile limit.’

    Six months is a long time in fleet, particularly when it comes to miles on the road. It’s all too easy to run over the allotted distance travelled.

    ‘Look at the excess mileage policy to ensure you’re not being excessively penalised for running over the mileage in that period,’ Mr Hudson says.

    ‘Where you have a certain size of fleet you should be negotiating pooled mileage. In some cases you’ll be charged for excess mileage in some cars but not credited for going under mileage in other vehicles.

    ‘Say to your leasing provider at the inception of the contract that given the size of the fleet you expect pool mileage.’

    EXCESS DAMAGE

    NOBODY expects a three-year old vehicle to be in the same condition as it was when it arrived in the fleet, gleaming and factory fresh.

    But the damage to a vehicle should reflect its age and mileage – stone chips and the odd dink are acceptable, larger bangs are not. Fleet managers need to be very aware of the condition of cars before they go back to the provider, and they also need to be sure that the provider has a transparent inspection process.

    ‘Make sure that there is a robust process of evidence of damage,’ advises Mr Hudson. ‘It’s important to ensure that the provider is able to prove damage so that if you do receive excess damage penalties they are able to support them.

    ‘In advance of the vehicle returning to the leasing company it should be inspected by you to see if there’s any damage that you want to fix before it goes back. It could be covered by your insurance.’

    EARLY TERMINATION

    THINGS don’t always turn out as expected, so you may find yourself with a vehicle that you no longer need. But take care.

    ‘Be very clear about the policy,’ warns Mr Hudson. ‘There are a number of different ways that a provider can react to early termination of a contract.

    ‘The first is to charge a percentage of the outstanding rental. For example, if you have a three-year contract terminated at month 12, you’ll be charged 50% of the outstanding rental – another 12 months, so you pay for two years when you only use the car for one.

    ‘The second is a fixed number of months depending on how far through the contract you are. ‘The third is an open cost charge, where the actual cost of depreciation is charged.’

    That could work either way. The leasing company charges according to expected depreciation, so if the contract ends early they may sell the car. If they get less than the expected depreciation they will charge you the difference, although if they get more you may get money back.

    Being aware of the issues surrounding the end of contracts is one thing, but thinking about it when the deal is drawn up in the first place can save huge headaches years down the line.

    ‘Really understanding the process can save you a lot of money,’ Mr Hudson says. ‘It all depends on the contract agreed at the beginning of the lease. You need to be very clear about the policies and processes to ensure you choose the appropriate route. It needs to be a planned process and you need to be aware of the pitfalls from the very beginning.’

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