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26th October 1956
Page 62
Page 65
Page 62, 26th October 1956 — RENTING
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Which of the following most accurately describes the problem?

Is It Wise?

MUCH interest has been aroused as the outcome of the news paragraph which appeared in The Commercial Motor dated October 5 concerning restrictions on the renting of vehicles. The subject was also raised in the leading article of the same issue. The Control of Hiring (Vehicles) Order debars operators of smaller vehicles from taking advantage of rental schemes. Potential owners of goods vehicles with a payload capacity of up to 30 cwt., and passenger vehicles constructed to carry fewer than 12 passengers, are so discouraged from entering these schemes by restrictions and regulations that the present types of rental plan are only of little use to them.

Let me deal with the legitimate types of use, thereafter referring to those which are the source of complaint on the part of those who would prefer to rent new vehicles but cannot now do so. The particular scheme I have in mind was described to me by H. A. Saunders, Ltd., London, N.12. Under this scheme, an initial deposit of 15 per cent. of the retail price of the vehicle is paid by the hirer on ordering. This represents' part of the first year's rent. This initial deposit is deducted from the price of the vehicle. The balance left is subject to capital charges at the rate of 6+ per cent. per annum in the case of commercial vehicles. At the termination of the agreement, which is for three years, the hirer returns the vehicle and will receive a sum equivalent to its trade value at that time.

Substituting Another

The hirer is responsible for licensing fees, insurance and all repairs, and pays in cash at the time of delivery for delivery charges and number plates. This is the scheme in its simplest fOrm. There are variations. A hirer can, for instance, have the option of substituting another at any time after 12 months from the commencement of the agreement.

Again, should the hirer be interested in keeping the vehicle for a further three years after the termination of the first period of three years, the vehicle is re-assessed at trade terms by an authorized trader and a new agreement on the lines of the previous one can be drawn up. For example: supposing a _vehicle is bought for £2,000. After three years Ile value would be in the region of £800. and that £800 can be put over another three-year rental if the customer so wishes.

Some explanation of the method of payment can be given here. The balance of the rental, plus rental charges, is due by monthly payments in advance. The first is paid in cash on the delivery of the vehicle to the hirer and the remainder monthly, secured by a promissory note, drawn on the hirer. as and,when each payment becomes due.

Now for some figures: I will take as an example the vehicle mentioned above, costing f2,000. The initial payment is 15 per cent. of £2,000, which is £300. The balance is £1,700,

n28 [he next item is the interest charge calculated at 6+ per cent. per annum. For a three-year hire that is a total of 19+ per cent. on £1,700, which is £331 10s. The total, £2,031 10s., is to be paid in 36 months so that the rental instalments amount to £56 9s. per month.

The operator must not forget that he is responsible for insurance, tax, levy, delivery charges and number plates which must be paid for at the time of taking delivery. They could amount to £120. He must therefore put down about £420 and pay a rental of £56 9s. per month. There will be a come-back at the end of the three-year period, , namely the return to the hirer of a sum equivalent to the

trade value of the vehicle at that date. In the example quoted, £800 was mentioned as a possible figure.

On the face of it, the scheme appears to be fair to botl; participating parties. It is of interest to take an example of ordinary hire-purchase methods and compare costs: first, the case of a vehicle purchased before the arrival of the credit squeeze and having a net value of £2,000. The period over which the hire-purchase contract runs may be 18 months or two years. If I take 18 months I shall cover the major part of such transactions.

The first thing to do is to ascertain what has to be paid as a " down " payment, Taking the vehicle as costing £2,000 net, the first thing to do is to add to that the sum of the following items: insurance, tax, levy, delivery charges, number plates, etc. Take it that the total is the same as in the rentals schemes, namely, £120. The gross value is thus £2,120. The next item is the finance company's charges which, in this case, will approximate to 1180. That must be added to the total, bringing it to £2,300. The down payment would be one-third of that, say £770. The balance, £1,530, must be paid off in 18 months, at which rate it will be £85 per month.

Now take the case today, according to which the down payment must be not less than 50 per cent, of the total. The initial payment will be about £1,150 and the instalments approximately £64 per month.

The principal object of rental schemes is to reduce the amount of the down payment, that being the buyer's chief difficulty. Prospective buyers cannot afford to put down over £1,000: the one object of all hire-purchase transactions is to enable the man with small capital to buy a vehicle: he cannot afford to do so with initial payments so high. The direct outcome is a reduction in sales. The indirect

result is that existing vehicles are kept in service longer than they should. The down payments in the three cases dealt with above are: rental, £420, that covering provision for the extra payments enumerated; pre-squeeze, 1.770; today, £1,150.

The foregoing figures do riot apply in the case of passenger vehicles with fewer than 12 seats or goods vehicles having a load capacity of up to 30 cwt. In such cases the whole of the rent and service. charges must be paid before signing a hiring agreement for a definite period of less than nine months. In any other hiring agreement, the whole of the rent and charges payable during the first nine months must he paid in advance.

Anyone who has already hired a vehicle for less than nine months is prohibited from making a similar arrangement for that vehicle during the next nine months. Subject to certain provisions to prevent evasion, the Order does not apply where the total hiring is not more than 90 days in any period of 12 months.

In considering this regulation, I do not think I need concern myself with periods of hire, of less than nine months. There must be few people who would want a vehicle for that time. I shall take the three-year period as an example. The extras, licence, levy, insurance, delivery charges and number plates, will cost about £80 and the total involved will thus be £920. Deduct the initial payment of 15 per cent, on £840, £126, and the balance on which the rent will be calculated is £714. The rent, for a three-year agreement, will be nearly £20 per month. The hirer will also have to find the £80 extras and his total initial payment becomes £206.

According to the new regulation, that initial payment must cover the whole of the payments for the first nine months, so that he will have to find £206, as above, plus nine months' rental, a further £180, making £386. If he goes to a finance company and arranges to pay for the vehicle in 18 months, he will have to find, in all, first the initial cOst of the vehicle, £840, plus the charge for extras, £80, and the finance company's charges, which will approximate to £80,

ERN Down Payment

That is £1,000 in all. The down payment will be 1500 and the monthly instalments £28. The average buyer of a vehicle of that capacity will be reluctant to put down 1500 as an initial payment and will undoubtedly postpone his purchase for quite a long time. probably for longer than he should.

Discussion of these matters has resuscitated the timehonoured suggestion that hire-purchase payments should be included in the, operating costs. That is wrong, and there is nothing about the rentals schemes to alter that.

When a man enters into a hire-purchase agreement or a rental scheme he is, in fact, acquiring a loan, to enable him to run his business. The interest on that loan, euphemistically referred to by the companies concerned as charges, is an establishment cost and has nothing to do with the cost of operating the vehicle concerned.

If operators were to examine, whenever the opportunity arose, balance sheets of haulage companies they would frequently find the item " interest on bang." That is justifiable in a statement such as a balance sheet; it has nothing to do with the operating costs of a vehicle and. so far as we are concerned, must come under the heading of "establishment costs." To include that exceptional amount of interest in the vehicle-operating costs would be to exaggerate those expenses and bring about a falSe idea of the total cost involved in ritnning the vehicle. This would complicate comparison of costs between one vehicle and another.

There are two important disadvantages which would accrue from the course which was suggested. First, that an unnecessary fluctuation would have to be taken into consideration when hire-purchase agreements were completed: Suppose an operator had a vehicle under an agreement which terminated in 18 months and that during that time he debited the hire-purchase interest against the operating costs of his vehicle, using the total thus arrived at as a basis for his charges.

At the end of 18 months, when the necessity to pay extra interest has disappeared, it would be advisable for him if he is to know how he stands as regards possible profit from any job of haulage, to diminish it by the amount of the hirepurchase interest—a process which involves complications which are better avoided. Secondly, direct comparison between the operating costs of one vehicle and another, so essential for efficiency of operation, would he made difficult because of the effect Of the varying amounts debited against interest on first cost.

No Separate Provision

Another suggestion which follows on these lines to a certain extent, is raised in a letter from one of my haulier friends. In his experience, he says, there are many hauliers, most of them owner-drivers who, having acquired a vehicle on hire-purchase terms, regard the instalments as corresponding with the amounts that they would normally have to spend on maintenance, depreciation and tyres, making no separate provision for any of these items.

Moreover, at the expiry of the hire purchase, these operators sell their vehicles and enter into new agreements Of a similar type. In his opinion this would lead to disaster in the end and he has asked me to deal with this particular aspect of the hire-purchase problem.

Let me take a straightforward example and compare it with a similar case in which the vehicle is purchased outright. Suppose we are concerned with a 5-ion vehicle the first cost of which is £1,000 in cash. (11 am taking a round figure to make subsequent calculations easier to follow.) •

If it is purchased through a finance company and paid for over two years, the initial deposit—the down-paymentwill, before the squeeze, have been about £280, and the finance company's charges £120. There will be a balance of £840 to be paid after the initial payment as above, That means that the monthly payments will be £35. After two years the operator, according to the procedure envisaged by my inquirer, sells the vehicle or disposes of it in part exchange for another, presumably af the same type and at the same price and gets £400 for it.

Now we come to the question of use. Not all vehicles cover the same annual mileage. and a good deal of the strength of the aegument concerning this method of carrying on a business turns on the mileage covered during the period of ownership. That faCtor may turn the scale one way or another. Assuming the.'average,mileage to be approximately 24.000 per..annum, the vehicle wilt have run 48,000 miles when the time comes eonclude. ,the hire-purchase

agreement. S.T.R.


Locations: London

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