What is a Finance Lease (FL)?
Finance Lease Explained
A Finance Lease is the ‘traditional’ lease option for businesses. It offers a flexible leasing option to fund a vehicle, without having the depreciation concern with owning it. This option is ideally suited for any 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 a FL
- Although the risks are transferred to you, any equity in the vehicle is also yours (minus a small admin fee)
- Can be structured how you choose, with or without a rental at the end to pay off the outstanding finance
- Agreement can be ended early
- However, you are responsible to find a buyer and sell the vehicle for enough money to clear off any outstanding finance
- 3 options at the end of the agreement
- Return the vehicle
- You sell the vehicle to pay off the outstanding finance – any left over cost is yours to keep
- Continue to use the car with the same monthly payments
- No mileage or ‘wear and tear’ charges
- Regular payments for easy budgeting
- If you have a van then you can buy the vehicle at the end
Cons to a FL
- Penalties can be high if the agreement needs to end early
- It’s uncommon, but the lendor may charge an admin fee for arranging the agreement.
- You won’t own the vehicle
How is a FL price calculated?
A finance lease cost is determined by the overall cost of the van, the length of the contract (usually 1-4 years or 5 for 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 say exact numbers.
At the end of the Finance Lease, you can either continue paying the monthly payments on a yearly contract (typically with a charge of one extra monthly payment) or become an ‘agent’ for the finance house and sell it on to a 3rd party to clear the outstanding finance.
If you’re leasing a van, the business can buy the vehicle, but if it’s a car it has to be sold to a 3rd party.