What Is Outright Purchase?

Outright Purchase is simply getting vehicles by purchase direct from the supplier without using finance.

The purchaser is then free to run the vehicle over any replacement cycle (or 'term') and sell the vehicle at any time (typically, though, vehicle fleet operators will use a specific number or months or miles as a guideline on when to replace a vehicle).

Additionally, it may be possible to arrange with the vehicle supplier for a repurchase or sales agency agreement to dispose of the car at the end of it's replacement cycle.

Under a repurchase agreement the vehicle is returned to the supplier at a fixed price to guarantee the disposal value.

In a sales agency agreement the supplier agrees to dispose of the vehicle on behalf of the purchaser for a fixed payment or a commission, reducing the purchaser's administration and related costs of disposal.

Outright purchase avoids direct finance charges, but ties up cash reserves/savings ('capital') as the buyer will have paid the full purchase price of the vehicle around the time of taking delivery.

This results in a loss of use of capital to the business and therefore a notional cost in terms of the use to which the cash could otherwise have been put ('opportunity cost'). Ignoring costs that apply across all finance methods (such as fuel and insurance), the major direct costs involved in outright purchase are likely to be depreciation, Vehicle Excise Duty, and maintenance.

Advantages of Outright Purchase

Because the purchaser takes ownership of the vehicle the purchaser can profit from prudent management of the vehicle, such as achieving a better resale price than market value through proper vehicle care, maintenance and management.

Vehicles can be sold at any time (e.g. when a driver leaves employment) without a specific financial penalty (leasing companies usually charge an early termination fee for disposing of leased/hired vehicles before the full term), though the depreciation cost will be proportionately higher when a vehicle is sold before the end of its normal replacement cycle.

Tax relief for the purchaser on cars with a CO2 output over 110g/km is not limited in the same way as leasing, thereby reducing the total costs of outright purchase for cars with higher CO2 emissions compared to leasing, but there are deferrals of tax relief where the CO2 output exceeds 110g/km.

From April 2021 the CO2 threshold for tax relief deferral ('special pooling') will drop to 50GP/Km.

Disadvantages of Outright Purchase

The purchaser is exposed to fluctuations in residual values and maintenance costs, in particular if used vehicle prices drop.

Money is tied up in the value of the car and the purchaser can't get any of this back without either selling the car or pledging it as security for a loan.

The vehicle will appear as a depreciating asset on the balance sheet of a business purchaser under accounting conventions applying at the date of publication.

For passenger cars (other than pool cars) VAT on the purchase price of the vehicle cannot be recovered, so the depreciation costs are higher than the comparable values in contract hire or finance or balloon leasing.

Lease or Buy?

To see the cost impact of leasing or buying your next new car or van click here.

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(+44 1792 224319 outside UK)