Finance lease is a popular funding option for commercial vehicles where contract hire is not always suitable.
A business uses the vehicle while paying a rental fee as opposed to repayment.
The monthly rental is determined by the vehicle’s initial cost (excluding VAT), the finance lease period and the residual value (the vehicle’s projected value at the end of the lease), plus interest.
Although you never take ownership, when the finance lease contract expires a payment equivalent to the residual value is payable. The vehicle is sold to a third party to cover this balloon payment.
Finance Lease. (FL)
Advantages of FL
· Minimum capital expenditure.
· Accurate monthly budgeting.
· Fixed interest rates available on some contracts.
· No damage recharge or excess mileage, as you are responsible for vehicle disposal.
· Ability to terminate early upon disposal of the vehicle.
· VAT registered companies can claim back 50% of the VAT and usually 100% for commercials (subject to no private use).
· Rentals can be offset against (all or some) business profits.
· Reduced administration.
· Ongoing advice and support.
· Option to include maintenance, servicing, MOT, tyre-replacement & puncture repair, plus full breakdown cover.
Disadvantages of FL
· You will never own the vehicle.
· You will only get the first year Road Tax – you will be invoiced for this thereafter.
· The vehicle must be sold to a third party at the end of the contract.
· Operating risk associated – you must achieve the balloon payment amount through disposing of the vehicle or cover the shortfall.
· Interest rates can vary.