It is a question that does not have a clear cut answer; it doesn't appear to make much sense to pay interest to a lender, when a company could be using its own money to purchase its company cars.

First of all there is a huge difference in the rate of interest a company would receive by keeping its funds on deposit and what they would pay to a finance company if they took out a hire purchase agreement, although in practice not many companies opt for this form of finance these days. However cash rich companies do often choose a leasing contract when acquiring company vehicles, what is the thinking behind this decision?

In the case of many companies it appears to simply be a matter not wanting to put their own money into an asset that is depreciating. It somehow goes against the grain and it is also probably something to with the fact that leasing is so inexpensive nowadays.

It is a lot easier to see £600 go out of your account every month in contract hire payments, than to see £53,000 go out in one hit. Also some companies may have thought at one time that if they used their own capital, they could always borrow if they needed to replace it. However 2008 must have demonstrated to companies that it does not necessarily follow that the funds will be available.

If a company opts for the outright purchase route, how do they know what the vehicle is going to be worth after three years? The fact is there is no way of knowing. All things being equal CAP is a very useful guide to future values; all things equal means no sudden deterioration in the economy and no sudden shocks like the oil price in 2008, both of which can have a significant impact on residual values.

There is no question of the fact that when there is turbulence in the markets, it is the values of luxury, sports and four wheel drive vehicles that get hit the hardest. The least affected appear to be those that have always tended to hold their values well, such as VW Golf or Audi A3, particularly diesel versions. So if a company is going to outright purchase its company cars, this type of vehicle would probably be a less risky option. As a general rule, cars that are heavily discounted when new tend to be those that do not hold their value so well.

A contract hire quote for a car that is going to do high mileage may appear expensive and make it appear a less attractive option than purchasing the vehicle. However all the finance company is doing is reflecting the lower residual value due to the higher mileage. If a company decides to purchase that vehicle they do need to remember that they also are going to be affected by the reduced second hand value. It is an important consideration when making a comparison.

Cars that are high mileage have a very limited market when they are second hand, so they are quite difficult to sell. Prospective purchasers seem to worry unnecessarily about high mileage. Perhaps it tends to be more the older purchaser who still remembers back to the 60's and 70's, when a car could be worn out with sixty to seventy thousand miles on the clock. Nowadays most cars will take 150,000 to 200,000 miles easily within their stride.

So what should a company that has cash in the bank do, Purchase or contract hire? It is an individual decision but knowing as they do now, that the banks cannot be relied upon, there is a lot to be said for holding onto one's cash and using the finance that is readily available to purchase company vehicles.