What is Finance Lease

Finance Lease is a method of funding a vehicle used by a business.  It is commonly favoured for commercial vehicles and by VAT registered businesses, where Business Contract Hire may not be suitable.  Cars can also be funded.

The business obtains the use of the vehicle by paying a rental each month.  The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the lease term, plus the cost of interest.  You can pay the entire cost via regular monthly rentals (referred to as a fully amortised Finance Lease).

At the end of the agreement, the business cannot take ownership of the vehicle.  It must therefore be sold to a third party company and a proportion of the sale proceeds are returned to the lessee, or you may be able to extend the Finance Lease agreement by paying a nominal secondary period rental for each additonal each year (sometimes referred to as a peppercorn rental).

Most Finance Lease companies can offer a number of payment options to suit your cash flow requirements.  You can lower the monthly rental costs by adding an optional final "balloon" payment rental to the contract.  At the end of the Finance Lease agreement a rental equivalent to the "balloon" payment is payable.  This is normally taken from the third party company sale proceeds and a proportion of anything left over is returned to the lessee, but please be aware that any potential shortfall risk will remain the responsibility of the lessee.

Advantages:

• Minimum capital expenditure
• Accurate monthly budgeting
• A fixed interest rate is available on most contracts
• No damage or mileage recharges, as you are responsible for the disposal of the vehicle
• Finance lease is a popular choice for VAT registered companies 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 VAT on the service element is 100% recoverable
• Rentals can be offset against the businesses profits.  Cars with a CO2 output above 50 g/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 50 g/km or below, there is currently no disallowance
• Optional maintenance package

Disadvantages:

• You can never own the vehicle, as you must sell it to a third party company at the end of the agreement
• Operating risk associated with the disposal of the vehicle
• Interest rates can vary on some contracts
• You must have fully comprehensive vehicle insurance
• Road Tax costs are usually only included for the first year

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