Everything you need to know about Finance Lease
FINANCE LEASE EXPLAINED
So, you’re looking to get one vehicle (or perhaps many) for your business, you want some flexibility but don’t want to have to worry about depreciation. A Finance Lease could be ideal for you.
A Finance Lease (also referred to as FL) is the ‘traditional’ lease option for businesses. It offers a flexible leasing option to fund a vehicle, without having the depreciation concern associated with owning it. A Finance Lease is ideally suited for you if you’re a VAT registered company.
The company pays a fixed monthly payment and at the end of the agreement the vehicle is sold to a 3rd party to clear the final payment. The contract can go for anywhere between 1 to 4 years (5 if it’s a van), with the option to extend for an extra charge (typically one monthly payment).
THE PROS OF FINANCE LEASE
- Although the risks are transferred to you, any equity in the vehicle is also yours (minus a small admin fee)
- The lease can be structured how you choose, with or without a rental at the end to pay off the outstanding finance
- Your agreement can be ended early
- However, you are responsible for finding a buyer and selling the vehicle for enough money to clear off any outstanding finance
- There are 3 options for you at the end of the agreement, you can:
- Return the vehicle
- Sell the vehicle to pay off the outstanding finance – any leftover cost is yours to keep
- Continue to use the car for the same monthly payments
- There are no mileage or ‘wear and tear’ charges
- The payments are regular and consistent, which makes for easy budgeting
- If you have a van then you can buy the vehicle at the end
THE CONS OF FINANCE LEASE
- Penalties can be high if you need to end the agreement early
- It’s uncommon, but the lender may charge an admin fee for arranging the agreement
- You won’t own the vehicle at the end of the lease
HOW IS A FINANCE LEASE PRICE DETERMINED?
A finance lease cost is determined by the overall cost of the vehicle, the length of the contract (usually 1-4 years, or 5 if you get a van) and the chosen end payment (also known as the balloon payment).
The balloon payment isn’t necessarily the predicted value of the car at the end of the agreement, as they won’t have mileage or condition information to estimate the value of the vehicle. Instead, it’s a suggestion of a sensible final rental payment. This is based on how many miles you say you are going to do, and how hard a life the vehicle will have.
The balloon can be set by you and will depend on how much you want to put down as an initial payment, and what cost you’re willing to pay on a monthly basis. This offers a great deal of flexibility, so it’s difficult to give exact numbers.
At the end of the Finance Lease, you have a couple of options. You can continue making the monthly payments on a yearly contract (typically there is a charge of one extra monthly payment to arrange this), or you can become an ‘agent’ for the Finance House and sell the vehicle to a 3rd party to clear the outstanding finance.
If you’re leasing a van, your business can buy the vehicle. However, if you’ve been leasing a car then you have to sell on to a 3rd party.