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Finance Lease

Finance Lease is a popular funding option for commercial vehicles or vans where Contract Hire is not always suitable or the best option.

Finance lease is a method of funding that allows you to use a vehicle without ever taking ownership. You are charged rentals throughout the contract period based on the purchase price and estimated residual value and at the end of the contract you return the vehicle to the lease provider who will sell it. If the resale value exceeds the estimated residual value you will be rebated the difference (taking into account disposal costs), however if the resale value is less then you will need to pay the lease provider the difference.
As you take the residual value risk, you will account for finance lease contracts as fixed assets which are recorded on your balance sheet.
Finance lease is often suitable for organisations used to outright purchasing who want to consider the funding benefits of leasing but who are comfortable taking the residual value risk on resale and therefore do not want to contract hire their vehicles.

Advantages:

  • Minimum capital expenditure
  • Accurate monthly budgeting
  • A fixed interest rate is available on some contracts
  • Finance lease is a very popular choice for VAT registered companies and businesses 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 service element VAT is 100% recoverable
  • Rentals can be offset against the businesses profits. Cars with a CO2 output above 130g/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 130g/km or below, there is currently no disallowance
  • Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company
  • Opportunity to benefit from potential profit on disposal
  • There are various payment options for organisations that have spare cash resources and may wish to accelerate VAT recovery and reduce interest costs
  • Other services can be added, including maintenance or accident services

Disadvantages:

  • You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement
  • Operating risk associated with the vehicle
  • Interest rates can vary on some contract
  • You must have fully comprehensive vehicle insurance

More Information on Finance Lease:

Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee.

Most finance lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the finance lease with a secondary rental (sometimes called a peppercorn rental).

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