How is the price of a Finance Lease calculated?
When it comes to business leasing, it’s important to know exactly what you are paying for. Transparency is key when it comes to pricing, and we know that.
That’s why we’re going to talk about how the price of finance lease is calculated and what affects the price.
How is the price of a finance lease calculated?
A finance lease is strictly for businesses, and is a slightly different form of leasing. You make monthly payments on a vehicle and when the contract ends, you have a few options.
You can continue to run the vehicle. This is done by paying a one off ‘peppercorn rental’ which is usually one monthly payment. This allows you to keep the car for another year. At the end of that year you can either pay the balloon payment or pay another peppercorn rental.[vc_single_image image=”45810″ img_size=”article-image”]Alternatively, you can pay a balloon payment at the end of the contract. This is determined by you at the beginning of the agreement, and, as there are no mileage or condition restrictions, isn’t based on depreciation. Instead, it’s more a sensible final payment.
Because this is a business finance scheme, you don’t tend to see cash back schemes on a finance lease. Instead, you can negotiate with the dealer or broker to see what discounts you can get. [vc_single_image image=”45811″ img_size=”article-image”]Something you do not want to do, and that we do warn against, is going for a high balloon payment in favour of lower monthly payments. There will be companies out there that offer really low monthly payments but a massive balloon payment at the end. And, we can understand why that would be appealing. After all, that’s three years away and you need to make the monthly payments much sooner. But, three years isn’t very long and it can come around very quickly. And, you might end up paying a larger balloon payment than the vehicle is actually worth. So, you need a happy medium between reasonable monthly payments and a reasonable balloon payment at the end.If you are a Limited company , not a sole trader or a small partnership, then you are not regulated by the FCA and therefore are not protected. So you need to be aware of companies offering you unrealistic monthly payments and really unrealistic balloon payments.In terms of working out the balloon payment, my advice would be to go on Autotrader and look for your vehicle. Find one that is the same age as what your vehicle will be at the end of your contract and see how much it is going for. As I said, you don’t want to be paying more than your vehicle is worth at the end of the contract.
So anyway, the price of a finance lease is calculated by taking the final balloon off the overall cost, and then dividing that by the length of the contract.
Do interest rates affect the price of a finance lease?
When you have a finance lease, you have two interest rates. One is a revolving interest rate, this is what pays the balloon payment because you’re never actually paying that back. It’s essentially like an endowment mortgage where you are only paying the interest and you still owe the same amount of money.
The other type of interest is the normal interest, this decreases as you make the payments.
These two interest rates are then combined to give you an APR, which is then added onto your monthly payments.