This article is brought to you by BMW UK.
For decades, many jobs have had a company car as part of their salary package. This could either be because the job requires the use of a suitable car, or because it is advantageous for the employee’s tax purposes. In the past, a company would purchase or lease a large number of vehicles and then simply allocate them to employees. Sometimes the employee would get some input as to the type of company car they wanted, sometimes not.
Most companies no longer directly provide a vehicle for employees, but instead provide a ‘company car allowance’ as part of the employee’s salary package. Sometimes the employer will impose restrictions on what sort of vehicle the employee can choose for their company car, but sometimes the employee is free to choose whatever they like.
The net financial position for the employee is usually equivalent to simply being given a car, but they can now choose how to spend this allowance on a car of their own choice and which suits their needs best. As a result, manufacturers like BMW have tailored car finance packages specifically designed to appeal to company car drivers.
Company car finance options
For company car drivers, there are generally two main choices of car finance from BMW: Personal Contract Purchase (PCP) or Personal Contract Hire (PCH). The two products have many similarities but a few important differences. Here we will explore these differences and explain how they may affect how you choose to finance your company car.
Personal Contract Hire
Contract Hire is a lease, rather than a purchase product, so you are essentially renting your BMW for the period of the agreement. The monthly payment will depend on the price of the vehicle, any up-front payment you want to make, how long you want to run the finance for (usually two to four years) and your annual mileage. Your annual road tax (if any) is also included, and you have the ability to include servicing and maintenance within your monthly payments.
Contract Hire is very simple, and particularly good if your company car is predominantly or exclusively for business use. If you are able to claim any VAT on the car (talk to your accountant), then Contract Hire is usually the cheapest way to drive a new BMW. Because there is a VAT component, a Contract Hire agreement can only be taken on a VAT-qualifying vehicle (new car or something like a demonstrator, rather than a pre-owned car where the VAT has already been paid).
At the end of the agreement, you simply give the car back to BMW Finance. You will be charged for any excess mileage or damage to the vehicle, or if you fail to follow the car’s service schedule.
BMW Select – Personal Contract Purchase
BMW Select is the name that BMW Finance gives to their PCP finance product. We have discussed how a PCP works previously, and it remains the preferred choice for most company car drivers if the car is going to be for predominantly personal use. There is no VAT component, so you can choose BMW Select for new or Approved Used BMW.
Once you have found a new or used BMW that you like, you choose how much you want to pay up front (including any part-exchange, if you want to trade in a car), how long you want to run the finance for (usually two to four years), and what annual mileage you expect to cover. You will see that the above is all very similar to a Contract Hire agreement, and that’s because they are both calculating the same thing – how much your car be worth at the end of the agreement, as this will determine the payments.
BMW Select is a purchase product rather than a lease, so instead of paying monthly rental payments, you are paying off a chunk towards owning the car (in housing terms, it’s like a mortgage payment instead of a rent payment).
Over the course of the agreement, you are paying off the car’s depreciation and at the end of the agreement you have a remaining amount outstanding. This amount is called the Guaranteed Minimum Future Value. You still owe this amount to the finance company, and you have three choices for how you settle this and end the agreement:
- Give the car back to BMW Finance. Essentially, this means that you have treated your PCP just like a Contract Hire. Similarly, you will be charged for excess mileage, damage or incomplete service history.
- Keep your car. You will have to pay the remaining finance outstanding (the GMFV), as you have only paid the depreciation. This is usually up to half the total value of the car.
- Part-exchange your car. You still owe the GMFV amount, but the car may well be worth more than this figure. If you part-exchange your car on another new or used car and it is worth more than the GMFV, the dealer will settle your GMFV and you can use whatever’s left towards your next car.
If you are not claiming VAT on your company car, then most drivers will tend to choose a PCP like BMW Select over Contract Hire. It offers more flexibility (used cars are eligible if you don’t want a new car), gives you more choices at the end of the agreement – including the option to buy the car outright – and is usually better if you want or need to change your car before the end of the agreement.
A BMW Finance representative can discuss your needs and provide you with specific quotations for both BMW Select and Personal Contract Hire agreements on your chosen vehicle.
Most car finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling of car finance must be accredited by the FCA. You should always consider the terms and conditions of any agreement carefully before taking out any form of car finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.