What is Finance Lease
Finance Lease is a product that is only available to businesses, for cars and Light commercial Vehicles (LCV).
A finance lease is an On Balance Sheet method of funding your vehicle.
The vehicle is purchased by the leasing provider, who then estimates the re-sale value of the vehicle at the end of the contract based on the total contracted mileage and the term of the contract. The difference between the purchase price and the re-sale price is then charged to the customer along with interest in the way of monthly payments and is referred to as the “Balloon Payment”.
The resale price is often either sold by the funder or the business and the Balloon payment is settled from the proceeds of the sale. The final mileage could have an impact on the balloon value based on the accuracy of the original prediction. If there is a surplus from the sale, this is returned as a refund of renewals, however, if there was a negative impact you would be expected to pay the shortfall.
Benefits of Finance Lease
- This method of funding offers you the security of fixed monthly payments coupled with lower rentals that are not based on the full depreciation cost of the vehicle
- You have the option to reclaim 50% of the VAT back on the rentals (if the vehicle is used for business and personal use) or 100% of VAT on the rentals where the vehicle is used solely for business use only.
- Fixed monthly payments which help with an even cash flow.
- Flexible terms and mileage based on a minimum 24 months up to a maximum of 60 months.
- Lower monthly payments due to VAT implications and the “Balloon” payment at the end of the contract.
- No excess mileage charges because you retain the risk and reward on the residual value of the vehicle.
- Finance lease – the resale value is calculated by the finance company based on the cost of the vehicle, mileage and term of the contract. All sales proceeds less any fees are used to settle the outstanding balance. If there is a shortfall, the business will pay the difference and if there is a surplus, it is refunded to the business.
With a flexible lease the full value of the vehicle is funded including interest and costs and based on its depreciation over the contract period. Again, the vehicle appears on the company’s balance sheet.
At the end of the contract the vehicle has to be sold to a 3rd party not related in any way to the business. The sale can be carried out by the business or the funder. When sold, the full sales value is returned to the business except for a percentage administration fee which is payable to the finance company.
The business also has the option to keep the vehicle at the end of the contract and run it for may more years if required and an annual figure is calculated by the funder usually ½% of the total annual rental, otherwise known as a Peppercorn rental.
As the cost of the vehicle is fully repaid over the contract period, the payments on a Flexible Lease are generally higher than Finance Lease.
- Contracted terms from a minimum of 24 months to a maximum of 60 months
- Monthly payments are fixed
- You can reclaim 50% VAT when used for business and private use
- You can claim 100% VAT if used only for business
- Flexible Lease – The vehicle is funded on its total cost over the contract period and is also known as a Fully Amortised finance. There is no final balloon payment and no risk from residual value
- You also have the option to extend the lease at the end of the contract for a small charge, otherwise known as a peppercorn rental.