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Finance Lease (FL) Explained

Please read carefully as it provides a summary of the key points of an FL agreement. It does not show all the benefits or exclusions – please speak to an experienced member of our team if you have any queries about whether this product is suitable for you.

Finance Lease (FL) - Suitability explanation

Finance Lease, often used for LCVs (light commercial vehicles), is a fixed-term rental agreement where the vehicle remains the property of the finance company and you have the use of the vehicle. You will pay an initial rental followed by subsequent monthly rentals and sometimes followed by a larger final rental (Referred to as Balloon or Estimated Sales Value) which will be based on your anticipated mileage. Rentals are subject to VAT.

Finance Lease (FL) differs from Contract Hire in that at the end of the agreement you must sell the vehicle to a third party. You (the Lessee) will receive a large proportion (usually between 95-98%) of the sale price (less the final rental if applicable) with the balance of the sale proceeds (usually 2-5%) being paid to the finance company (the Lessor). If the agreement has a large final rental and the sale price is less than the final rental, you will be required to make up the difference.

Benefits of Finance Lease (FL)

  • Gives business customers use of an asset of a newer, higher specification than they could otherwise buy outright
  • Min. capital expenditure, the cost of the asset is paid by monthly instalments rather than a large upfront investment
  • The cost is spread over a period of time and paid by fixed monthly instalments that will not increase
  • Tax advantages – VAT is payable on the rentals, not the purchase price, while rentals may be offset against taxable profit (special rules apply to cars)
  • Claim up to 100% of the VAT on commercial vehicles, and 50% on cars (subject to being VAT registered)
  • Flexible repayment structures are available, tailored to match your company’s cash flow
  • No mileage restriction
  • No damage recharge as you are responsible for the disposal of the vehicle
  • A portion of the initial cost deferred until last month of the contract
  • If you wish to own or buy the vehicle as the finance company are the legal owners.
  • If you would like to shorten your period of hire by pre-paying
  • If you do not know what your predicted mileage will be (if you opt for a large final rental)
  • If you are concerned about the risk in the loss in future value/depreciation
  • If you plan to export the vehicle or use abroad for extended periods

Finance Lease (FL) may not be suitable for you in certain circumstances, for example

  • If you wish to own or buy the vehicle as the finance company are the legal owners.
  • If you would like to shorten your period of hire by pre-paying
  • If you do not know what your predicted mileage will be (if you opt for a large final rental)
  • If you are concerned about the risk in loss in future value/depreciation
  • If you plan to export the vehicle or use abroad for extended periods

Taking care of the vehicle

  • You must ensure the vehicle is comprehensively insured at all times
  • It is a condition of the Manufacturer’s warranty that the vehicle is serviced and maintained in accordance with the manufacturer’s requirements. They recommended that you use the services of a main franchised dealer

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Our mission is to bring transparency to the leasing industry. So we’ve created a series of leasing guides to give you the power to lease well.