Finance lease is not the most popular lease, but it is perfect for some requirements.
But, what exactly is it? And who is it best for?
In this article we give you an overview this option, its pros and cons, and who it’s suited for.
What is a finance lease?
Finance lease, or FL, offers a more flexible way to finance a vehicle.
The contract is similar to contract hire in which your company pays fixed monthly rentals for a certain amount of time. However, the difference comes at the end of the contract.
At the end of the agreement, you will have a final rental. This is larger than your monthly rentals.
The balloon is set by you, and is determined by how much you want to put down initially and how much you are paying monthly. You can pay for this balloon payment by selling your car onto a third party. If it’s a van, you can keep the vehicle and clear the balloon using your own funds or getting a loan to clear it.
Alternatively, you can pay something called a peppercorn rental. This is normally the cost of one monthly payment. It allows you to keep the vehicle for one more year. After that, you can either pay another peppercorn rental or pay the final balloon rental.
Who is finance lease best for?
This finance option is best for those whose vehicles are going to be suffering from more than their share of fair wear and tear or doing excessive mileage. It’s also good for vehicles with conversion units, such as refrigeration units.
This option is also great for VAT registered business, as they can offset 50% of the VAT on a car, and 100% of VAT on a van on the company VAT return.
Also, 100% of the rental can be offset against the tax on a van.
What are the advantages of a finance lease?
Some of the advantages of this option are;
- Any equity in the vehicle is yours (minus a small admin fee)
- The agreement can be structured how you choose, with or without a rental at the end to pay off the outstanding finance
- The 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.
- There are three options at the end of the agreement;
- Return the vehicle – the finance house will then put the vehicle into auction. If it clears what you owe then you have nothing left to pay. If it doesn’t, you will need to make up the difference.
- Sell the vehicle to pay off the outstanding finance
- By doing this you have to find a buyer for the vehicle and agree a price. You will then introduce the buyer to the finance house and they will then pay the finance house for the vehicle. If they have paid more for it, then you will get the difference (minus fees). However, if they pay less, then you have to make up the difference.
- Pay a peppercorn/secondary rental and keep the vehicle for another year
- If you have a van, then you can buy the vehicle at the end.
- There are no mileage or wear and tear restrictions
- The payments are regular – which makes for easy budgeting
What are the disadvantages of a finance lease?
However, there are of course, disadvantages to this option. Such as;
- If you sell the vehicle for less than you owe, you will have to make up the difference.
- While it’s uncommon, your lendor may charge an admin fee for arranging the agreement
- You won’t own the vehicle (unless you buy it at the end of course)
How is the price of a finance lease calculated?
The cost of this agreement is calculated by;
- The overall cost of the van
- The length of the contract
- The cost of the final balloon rental
The balloon payment is not how much the vehicle will be worth at the end of the agreement, because there is no idea of mileage or condition. It is set by the lease company. Alternatively, 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.
So, hopefully this has cleared a few things up about finance lease. While it’s not the most popular, it’s a great option for those doing excessive mileage, aren’t going to keep their vehicle within the fair wear and tear standards, or have conversion units.