Shall I BUY, HIRE or RENT?
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Points to Decide When Considering , Methods of Purchasing Vehicles Under a Deferred-payments Scheme
THE policy of hiring commercial vehicles has become increasingly popular in recent years, having already become well established with private cars. With commercial vehicles, however, there is the added complication of licensing, so that one has to be careful to make a clear distinction between this aspect of the matter and hiring as a financial proposition.
Because production in Britain has increased by a third in the past 10 years, there has been a heavy demand on capital resources. Equally, however, there have been simultaneous demands for rapid delivery of the finished or semi-finished products of expanding industries. The only method of ensuring quick transport is often thought to be the acquisition and operation of one's own vehicles. To do so adds to the already strained demand on capital resources if vehicles are purchased outright.
• Last week I discussed the hire purchase of vehicles and those items of operating costs which would not have to be met immediately, particularly if it was a new vehicle which had been acquired. It was shown that a monthly hire-purchase payment consisted of two items—the repayment of capital, plus an interest charge. Under this method, whilst the vehicle becomes the property of the operator, he will eventually have to make good the difference between the cost price and the ultimate resale price if he is to retain his original capital, or its equivalent.
As explained in " ' The Commercial Motor' Tables of Operating Costs," it is recommended that the cost of depreciation should be based on mileage and the appropriate amount allocated weekly to a sinking fund set up for the purpose of taking charge of this and other deferred items of operating costs.
In addition to outright and hire purchase, there is a third method of providing vehicles to be both maintained and operated by the user—on a rental basis. To avoid any misunderstanding, I would emphasize again that this is distinct from acquisition under a C-hiring arrangement.
It is purely a financial proposition, and whilst the vehicle does not become the property of the operator, he has complete choice as to the type and, to some extent, the renewal period. Under such an arrangement the smaller, lower-priced vehicles might be renewed every two years, or every three or four years where heavier vehicles were involved.
In contrast to hire-purchase arrangements, no deposit is required. Instead, it is necessary to pay three months' rental in advance. Where the rental period extends to three or four years, the annual rental is graduated, the highest amount being payable in the first year and the lowest in the final year. Because n42 the operator never becomes the owner of the vehicle, he is not worried by problematical resale values and so has no depreciation cost to meet.
I now propose to draw a comparison between the three methods—outright purchase, hire purchase, or rental—as applied to three widely differing types of commercial vehicle—a 10-cwt. van, a 7-ton platform oiler and a 41-scat coach.
I will assume that, however the vehicle is provided, it is the policy of the operator to replace his rI0-cwt. delivery van every two years. If bought for cash for £580 and sold at half its value at the end of the second year, depreciation would amount to £290, or £145 per year. Assuming a nominal interest rate of 3 per cent, on the outlay of £580, the annual interest charge would amount to approximately £18, which, together with the annual cost of depreciation, would total £163. By this method, therefore, the total initial outlay would be £580, with a total cost over the two years for interest and depreciation charges of £326.
Regular readers will note the altered method of dealing with depreciation in this instance. This has been done to provide a more ready comparison with the rental scheme and tyre replacement would probably not be necessary within two years.
Minimum Deposit Under a hire-purchase arrangement, and assuming the operator wished to make the minimum deposit, this would amount to £194, being the minimum of a third as stipulated by the Board of Trade Statutory Instrument No. S.I.430. If we add to the balance of £386 an interest charge of £31 (at an average rate of 8 per cent.), there is a balance outstanding of £417.
Again assuming that the operator wishes to take the maximum advantage and spread his payments over 24 months, a monthly payment of £17 would then ensue. In this instance, therefore, the total initial outlay would be £194 and the total payments £417.
Turning now to the rental scheme, a typical example shows the annual rental of a 10-cwt. van to be £265 where a new vehicle is provided every two years. As I mentioned earlier, three months' rental is required in advance, so that in effect the total initial outlay is £66, whilst the total cost for the two-year period is £530, which includes the advance payment.
Taking the average figure of £1,700 as the cost price of a 7-ton platform oiler and again allowing a resale value of 50 per cent., but this time after three years, cost of depreciation would be £850, or approximately £283 a year. Where the vehicle was purchased outright, interest on the capital outlay at 3 per cent. would amount to £51 per annum, which, together with depreciation, would total £334. After an outlay of £1,700, therefore, the total cost of servicing and maintaining the capital would amount to £1,002.
Obtaining the same vehicle by hire purchase would require a minimum deposit of £566, leaving a balance of £1,134. Interest on this sum at 8 per cent, would amount to £91, making
a total cost of £1,225 in addition to the total initial outlay of £566.
Where the 7-tonner was rented, and assuming it was replaced with a new vehicle after three years, the three annual rentals, as quoted in one example, are graduated as follows:—First year £815, second year £760 and third year /689, making a total for the three years of £2,264. The total initial outlay, already included in this figure, would be £204, based on three months' rental at the rate applicable to the first year: Making the same comparison for a 41-seat coach, if the initial price is £2,800, with a50 per cent, resale value after three years, the annual cost of depreciation would amount to approximately £467, to which must be added a further £84 in interest. again at 3 per cent. on the cost price. This gives an annual
cost of £551, or £1,653 for the three years in addition to the total initial outlay of £2,800 when the vehicle is purchased outright.
If the vehicle were obtained on hire purchase, the initial deposit would be £933, leaving a balance of £1,867. Adding a service charge of £149 would give a total of £2,016 to be met over the three-year period, after which it is assumed that the Vehicle would be replaced. Acting in accordance with the present regulations, this amount would in fact have to be paid within the first 24 months of that three-year period. The graduated annual payments under the rental scheme for the -41-seat coach would be as follows:—First year £1,510, second year £1,408 and third year £1,274, making a total of £4.192 As previously, the initial outlay would amount to the first three monthly rentals, which, calculated relative to the annual rental payable for the first year, would be £377. In addition to making comparison between the amount of initial payment and the total payment throughout the period, it is necessary to consider the operator's position both before and at the end of either the two or three years. Where the vehicle is purchased outright, the operator started with a capital amount of £580, £1,700 or £2,800. If due allowance for depreciation has been made as indicated and the estimated resale value on disposal was realized, the two items would restore the capital to its original amount. In other words, the operator would finish all square. If, however, the vehicles are obtained on hire purchase, an initial deposit of £194, £566 or £933 has to be found by the operator, whilst at the end of the period he is left with a vehicle estimated to be worth £290, 1850 or £1,400 respectively.
Should the rental scheme be adopted, the operator finishes in precisely the same position as when he started—without either vehicle or capital, except that the payment of three months' reatal has to be made in advance.
Because all these three methods of acquiring vehicles arc used by many operators, it is not possible to generalize as
• between the merits of one or the other. My object has been to put forward points to be considered when deciding which to select. S.B.