Some look at car leasing over a shorter term, others enquire if they can purchase their lease car at the end of its term. This raises the question, if it makes financial sense for a company to opt for car leasing rather than buying their vehicles, why then does it make sense to buy them in difficult economic times?
It is possible that the company may be cash rich and has decided that as interest rates are low they will use their capital as a means of reducing their outgoings in a downturn. If this is not the case then the company should perhaps consider carefully before using their cash.
On occasions, presumably the thinking is that they are unsure if they will be able to continue employing the member of staff who is driving the car and therefore if they are forced to make them redundant, at least they will not be stuck with the monthly car payments.
The finance companies will sometimes extend the term of an agreement for a short period but generally if it is going to be for more than a month or so, they will require that a new contract is signed for a longer term.
This is understandable because the finance company has to be able to plan its disposal of their lease cars and cannot afford to have a large number of clients who may return their vehicles at any time. Whilst the client expects this arrangement to be at the same monthly rental or lower, this is not always the case, the cost sometimes goes up.
What are the downsides of extending the term on a vehicle? Well the obvious one is the warranty; assuming the vehicle is coming to the end of a three year term, at the same time, most cars will be coming to the end of their three year warranty. There are some exceptions such, as Porsche that has a two year warranty.
Certainly an economic downturn is not the time to be running the risk of having cars on the fleet without a warranty, because it creates too much uncertainty. The safest option is to take a manufacturers extended warranty, it may seem expensive but the annual cost is a reflection of the risk of the car going wrong. The cost of the warranty then has to be taken into account when looking at the viability of either extending the term, or buying the vehicle.
Companies understand that if they are buying a contract hire car, that they are responsible for any repairs from that point on, if it is outside its warranty. Many of those who opt to extend the term do not however realise that if they do not have a maintenance contract and the vehicle is outside its warranty period, it is their responsibility, not the car leasing company if it goes wrong. It is worth clarifying, that if there was a maintenance agreement with the original contract, that it will continue if the term is extended. It certainly should be but different companies have different policies on this.
If it does go wrong it will probably be the most unpredictable of all failures; an electronic fault. It is the one fault that nobody can predict how long it will take to rectify or how much it will cost. So running a car without a warranty is just not practical for a company that needs to keep its vehicles on the road.
Perhaps a more practical approach would be to talk to a contract hire broker and establish which new cars are available on a short term basis. Certainly withdrawing from a lease car contract before the end of the term is expensive but then it can also be expensive running a vehicle that is at the point where it can start to show signs of wear and tear, particularly when depreciation is taken into consideration.
