Finance Lease is a popular funding option for commercial vehicles or vans where Contract Hire is not always suitable or the best option.
When looking to fund vans or perhaps other commercial vehicles, Contract Hire may not always be the best choice or the most viable funding option for a business. Instead, a Finance Lease is a more feasible and popular choice.
In this instance, businesses pay a rental amount whilst using the vehicle, rather than the typical ‘repayment’ that you would pay under alternative finance agreement types. This rental amount is reached by calculating certain factors:
- Initial cost of the vehicle (minus the VAT)
- The agreed length of the finance lease
- Finally, the residual value of the vehicle, plus interest. This residual value is what funders believe the vehicle will be worth once the agreement has reached its end, taking depreciation, wear and tear, etc into account.
What are the advantages to choosing a Finance Lease?
- Finance lease is a very popular choice for VAT registered companies and businesses as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use). On contracts with maintenance the service element VAT is 100% recoverable
- Minimum capital expenditure
- Reduced administration
- Accurate monthly budgeting
- On-going advice and support
- A fixed interest rate is available on some contracts
- Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company
- No damage recharge as you are responsible for disposal of the vehicle
- Optional full maintenance package with breakdown rescue cover
- Rentals can be offset against the businesses profits. Cars with a CO2 output above 130g/km are currently subject to a 15% disallowance on the amount of the rental that can be claimed against the businesses taxation, for cars with a CO2 output of 130g/km or below, there is currently no disallowance
Like any other way of funding a vehicle, there are a few disadvantages to a Finance Lease:
- Interest rates can vary on some contracts
- Vehicles cannot be insured on any other level other than fully comprehensive
- You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement
- There is always the operating risk associated with the vehicle.
More Information on Finance Lease:
Finance Lease contracts are like Contract Hire agreements, in that you never end up owning your vehicle. However, the difference is that with Finance Leasing the final payment is the equivalent of the vehicles residual value. So, you pay how much the vehicle is worth at the end of the contract after depreciation costs. What usually happens then is the vehicle is sold and a percentage of the sale proceeds are returned to you.
The greater number of finance lease lenders will provide you with optional payment plans to best suit your available funds. You can opt for what is known as a fully amortised Finance Lease which means you pay the complete cost over monthly instalments or rentals. Or, if cash flow is temporarily restricted, as in the case of some start up businesses for example, you can lower monthly rental amounts and choose to make a balloon payment on completion of the lease.
With a fully amortised Finance Lease, some funders will allow you to take out a secondary rental to extend the finance lease. This is occasionally referred to as a peppercorn rental.