Lease mileage allowance : what you need to know
Leasing a vehicle involves using the vehicle for a fixed period of time against a set cost. Lease schemes are offered by car dealers as an alternative to buying a vehicle for business without having to pay the full price of a new vehicle. The lease period usually runs for between one year and four years, after which time the vehicle can be returned to the leasing company or purchased for the residual value.
Vehicles leasing for company : a good way to maintain a fleet of cars
Many businesses and self-employed workers chose vehicle leasing for their company cars as the monthly payments are usually lower than any loan repayments would be if they had to buy the vehicles outright. It also allows companies to maintain a fleet of cars which are renewed every two or three years. Leased vehicles are usually always under the manufacturer’s warranty as they are normally returned before it runs out. This also results in reduced repair costs.
Some companies see leasing as a way of maintaining a fleet of company cars that are at the cutting edge of technology. As electric car technology improves, companies can reap the benefits of shifting from petrol or diesel more quickly by leasing rather than buying their vehicles.
Lease contracts are finance agreements between the dealer and the company which set out the length of the agreement and usually indicate what is known as an “early termination fee”. This is a fee to be paid by the lessee to the dealer should they decide to return the vehicle before the agreement expires. Some agreements may include maintenance as standard, in which case the lessee does not have to worry about routine maintenance costs.
The standard lease period is anything from one year to three or four years. However, some vehicle leasing companies offer very short-term car leases aimed non-European residents travelling in Europe for short periods of time. These leases are VAT-free and include a brand new car, full risk insurance and 24-hour assistance.
When it comes to leasing a vehicle, the term “mileage allowance” refers to something quite different than the approved mileage allowance payments which are set by HMRC for employees using their personal vehicles for business purposes.
With regards to leasing vehicles, a mileage allowance is a maximum number of miles which must not be exceeded during the course of the lease agreement. This figure is agreed upon by the dealer and the lessee at the start of the agreement and impacts the amount of the monthly payments. An agreement which includes 5,000 miles per month will cost more than one which only goes up to 1,000 miles per month.
When the lessee returns the vehicle at the end of the lease, the mileage is noted. If the total mileage is over the mileage allowance set out in the contract, the lessee is liable to pay an “end-of-lease excess mileage charge”. This may amount to hundreds or even thousands of pounds. In contrast, if the lessee has driven less than the number of miles in the contract, they are not reimbursed and will have effectively overpaid for the duration of the contract.
It is important, therefore, to carefully consider how many miles are likely to be driven and to try to keep within the limit.
Calculating annual mileage
It is important to choose the right mileage allowance for a leased vehicle as this will have a significant impact on the level of the monthly payments. This is because the number of miles a car has driven significantly affects the value of the car. The more miles a car has been driven, the lower its value. The result is that a car that is returned to the lease company with more miles on its clock than anticipated is worth less to the dealer than stated in the agreement. Dealers try to compensate for this by specifying excess mileage charges or penalties to recoup the difference.
Unless you have been keeping accurate records of your annual mileage in the years leading up to leasing a vehicle, the best way to calculate your annual mileage is to calculate your weekly mileage (including weekends) and multiply this figure by 52. For example, if you drive 100 miles per week, your projected annual mileage would be 5,200. If you drive 500 miles a week, your annual mileage would be around 26,000. You should also take into account any unusual trips, such as long family holidays, where you can easily clock up thousands of miles on top of your standard commute.
Excess mileage charges
The recent COVID-19 pandemic and the resulting lockdowns resulted in many people not driving as often as they used to. Other situations, such as illness, market conditions or fuel prices also have an impact on the number of miles people actually drive in comparison with their anticipated mileage. Because circumstances can change during the course of an agreement, it may be useful to contact your lease company if you think that you risk going significantly over or under the agreed mileage allowance. This may mean that you can adjust your payments at an early stage to effectively reflect your actual mileage.
It is usually possible to adjust your monthly payments if you realise that you are driving more or driving fewer miles than expected. Perhaps you signed a new contract with a client that involves travelling more frequently to their offices, or you lost a client and no longer have to drive to meet with them every week. In both cases, you should contact your dealer to try to negotiate changes in your lease agreement.
Most dealers will allow you to “buy” extra miles if you anticipate exceeding the agreed mileage allowance. There is usually a fee to do this, as it involves changes to the legal documentation. But, it still may be better to pay this fee than wait until the end of the contract and pay the penalty. Charges will usually also be incurred if you need to adjust your mileage allowance downwards, although again, this may be in your favour. It is important to research all the costs involved before making a decision.
Do you want to find an easier way to manage your leased vehicle arrangements? Do you want to make it easier for your staff to track their mileage and choose the right contract? Mooncard Mobility may be just the solution you are looking for. Get in touch for a no-strings-attached demonstration and a tailor-made quote corresponding to your business needs.