What is Finance Lease?
Finance lease is a popular way for businesses to finance new vans and cars, particularly in circumstances where a contract hire agreement is unsuitable. Finance Lease agreements are not available to private customers, however they offer great flexibility and significant tax benefits for eligible companies.
Finance Lease Options
With a Finance Lease contract there are usually two different choices offered to you:
- You can either spread the entire cost of the vehicle (this includes interest charges) over an agreed period (usually between two to five years), this is otherwise known as a Flexible Lease (FLEX) .
- Or you can opt to make deferred payments. With this option (the more traditional Finance Lease agreement) you pay lower monthly rentals with a final (or balloon) payment based on the projected value of the car or van at the end of the agreement.
Following both scenarios, you are required to sell the vehicle to an unrelated third party, with you keeping 98% of the proceeds. The alternative is paying off the outstanding ‘balloon payment’ and operate the vehicle under a secondary rental period called a ‘peppercorn’ agreement. Please be aware that with a finance lease agreement you never actually have ownership of the vehicle, it remains the property of the leasing company.
Could Finance Lease Work for My Business?
If you opt for a finance lease agreement for a new vehicle, you will essentially be hiring that vehicle for an agreed period (two to five years) and make regular monthly payments to hire it. Your business will have usage of the new vehicle without the large upfront cost associated with straight purchase or hire purchase funding options, handle the administration of the car or van and have the vehicle’s assets show up on the business’ balance sheet.
Monthly payments are based on the usage parameters agreed during the quotation stage, with the final balloon payment based on the expected residual value of the vehicle based on the pre-agreed parameters. There are no excess mileage charges as such, however exceeding the mileage specified is likely to affect how much the vehicle is worth when it comes to the selling stage.
If your business is VAT registered then you are able to reclaim between 50% and 100% of the VAT payments depending on whether you are leasing a car or a van. If your business is not VAT registered then you can opt to incorporate the VAT costs into your monthly rental and spread it across the term of the leasing agreement.
You are normally able to offset your monthly rentals against taxable profits in a van leasing agreement, special rules apply to car leasing agreements.
What Are The Benefits of Finance Lease?
- Fixed monthly payments for the entire leasing agreement
- Low upfront costs, minimum of only 3 monthly payments upfront
- Claim 100% of the VAT on vans and 50% on cars if you are VAT registered
- Variable or fixed interest options depending on which best suits your requirements
- Flexible repayment options depending on what best suits the cash flow situation of your business
- Significant tax advantages with VAT payable on the monthly rentals and not the purchase price of the van, special rules apply for cars
- No excess mileage or damage costs that you’d find in a contract hire agreement
- Despite not owning the car or van, you will receive 98% of the proceeds from sale of the vehicle to a third party at the end of the leasing contract
I’m Interested, What Do I Do Now?
Interested in a new van or car on finance lease? Your search is over! Leasewell have a massive range of brand new cars and vans for sale with FREE UK wide delivery on every model. Simply submit your details online or call us on 01656 337 337 to get the ball rolling today!