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11.11.08: Contracts contracting

Time 13 years ago

DELIVERY driver collected a car from us today. Asked how business was. The usual chit-chat.

But also revealed something interesting. His business was seeing less activity from the contract-hire movement side. Why? Businesses are extending their contracts, he says.

This, on the face of it, makes no sense. Cars are depreciating assets. Why keep one longer than necessary, when you could, in theory, change into a brand-new one for the same monthly payment? Contract hire is just that: you hire the car for a contracted period, with payments geared around that. The logic of extending it just doesn’t seem to add up.

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But, analyse the situation more closely, and you can perhaps see what companies are up to. For starters, one of the fleet mags I read reckons the leasing deals arguably aren’t around like they used to be. Leasing companies have been hit badly by the huge falls in RVs this summer. They have to balance the books somehow, and if that means not quite splurging as many incentives on thousands of Astras and Mondeos, then so be it.

Now is also a bad time to be selling cars. Much better to extend the contract by three months, then dispose of the cars early in 2009. By this stage, the Government may finally have ended speculation over March’s tax rule changes. Officially, they’re set in stone, but that isn’t stopping people rumour-mongering

Oh, and some leasing companies will, for those switching from a three-year lease to a four-year contract, backdate payments accordingly. This means a small rebate is given. Factor this across a large fleet, and you can see why extending contracts makes sense, in part.

Don’t forget too, depreciation curves flatten with time. This means that if you extend, you can sometimes renegotiate, for lower monthly payments.

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All of which means it’s a trend that’s on the increase. Which is why experts reckon the big hit on new car sales may not come until next year. That’s when the volume fleet business is really going to start being affected: some reckon sales could dip below 1.8 million, or even lower.

One in every two sales is a fleet sale. While experts reckon we’ve already seen the worst of the declines in the retail side, the full downward swing in business sales could be yet to occur.

I, for one, will be tapping up my delivery driver mate for further observations, next time he’s here…

RICHARD

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Car Dealer has been covering the motor trade since 2008 as both a print and digital publication. In 2020 the title went fully digital and now provides daily motoring updates on this website for the car industry. A digital magazine is published once a month.

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