Finance Lease
What is Finance Lease?
Finance Lease is a method of financing new vehicles, available to many types of business, including Limited Companies, Partnerships & Sole Traders. Cars and Commercial Vehicles can be financed in this way. A monthly rental is charged for the vehicle which is based on either the total cost of the vehicle divided over the term, or a lower monthly rental with a final payment, also know as a balloon payment. This method of funding is popular for businesses where contract hire is not suitable & the customer understands that they are taking the risk of depreciation of the vehicle.
How Does It Work?
A finance company will purchase the vehicle (and be the registered owner of the vehicle), all vehicles are to UK specification, new & supplied through UK franchised dealers. The finance company, in turn, will lease the vehicle to a business for a fixed term, with an agreed annual mileage, at a fixed monthly cost.
Standard terms for Finance Lease are between 2 & 5 years, whilst most business will opt for a 2, 3, 4 or 5 year lease, some funders do offer any term between 2 & 5 years, so you could opt for a 30 or 42 month lease as examples..
If your business is VAT registered, you can claim 50% of the VAT payable on the finance element and 100% of the VAT on the maintenance element.
What’s included in the lease?
Your agreed monthly contract rental covers the cost of use of the vehicle, your road fund licence, or RFL, is also included in the cost of the lease. If you have opted for a funder-maintained lease, the costs of all routine servicing & maintenance, as well as tyre replacement is also included in the cost of the lease. If you have opted for a customer- maintained contract, you will also be financially responsible for all routine servicing & maintenance costs, as well as tyre replacement. Insurance is not included in the cost of the lease, although there is an insured product available in the market.
What happens at the end of the lease?
At the end of the agreement, the customer will sell the vehicle to a non-related third party, with the value of the sale being utilised to pay the final balloon payment (if applicable). The value of the vehicle may result in a deficit which the customer would be liable for. In some cases, it is possible to pay the outstanding balloon payment and continue to operate the vehicle under a peppercorn agreement. Some funders also offer the option to re-finance the outstanding balloon payment.
What’s the role of a broker in all this?
Many businesses will utilise the services of a broker when searching for a new vehicle & contract. A broker may have access to multiple leasing companies special offers and rates and should be able to offer you the most competitive contract hire rates available, these are often better terms than an individual business is able to access directly with manufacturers or dealers.
The broker will be able to offer you quotes on every make & model and be able to assist you in finding the most suitable vehicle and funding method for your business.
The broker will take you through the funding process and arrange the credit required to purchase the vehicle, They will also source the vehicle with the best discounts available and guide you through the process from quote to delivery stage.
Once the vehicle has been delivered, most brokers will also assist with any mid-term contract requirements, and help with end of contract needs, such as returning vehicles or arranging extensions.
What are the benefits of Finance Lease?
Fixed low monthly rentals – an economical way to source a brand new vehicle.
Choice of contract length – 2 to 5 years with some funders allowing any term within 2 to 5 years, such as 30 or 42 months.
Payment profile choices – you can decide how small or large you make your initial rental, this could be 3 in advance or up to 12, whatever payment profile you decide upon, the total payable will be about the same across the duration of the contract.
Optional maintenance packages – spread the cost of servicing & tyres across the duration of the contract – avoids large one-off bills.
Opt to pay the full value of the vehicle across the term of the agreement through a higher monthly rental, or reduce the monthly rentals to a lower amount, with a final balloon payment to clear the balance.
Potentially options available to re-finance the balloon payment (not available through all funders, please ask your Account Manager for more details).
Are there any downsides to Finance Lease?
No option to terminate the contract early, without selling the vehicle to a non-related third party and repaying the total value of the vehicle costs outstanding.
The risk that the sale value of the vehicle at the end of the agreement, will not be sufficient to cover the final balloon payment.
The customer does not take ownership of the vehicle it is leased for the term of the contract and then sold to a non-related third party.
Target Market for Finance Lease:
Business customers (Limited Companies, PLC’s, Partnerships, Sole Traders, Charities, Public Sector Bodies, Clubs & Associations), that have expressed an interest in leasing a new vehicle for a fixed period & mileage, and with selling the vehicle to a non-related third party at the end of the agreement.
Alternative products in the marketplace
There are other products available, which might be suitable for your needs & purposes, it is important to make you aware of these, so we have included some alternative products, with some basic details of what they are. These are not necessarily products that we offer but please get in touch to discuss your requirements further.
Business Contract Hire – A method of financing new vehicles where, you are renting the vehicle for a fixed term & with certain contracted criteria, such as annual mileage. This method of financing is popular with drivers that like to upgrade their vehicles every few years and value the benefits of fixed monthly motoring costs. It also avoids the hefty financial commitment of purchasing vehicles and helps with maintaining an efficient and cost-effective business fleet. The amount of the monthly rental is calculated by the length of the contract, the annual mileage, and the anticipated residual value at the end of the agreement.
Lease Purchase – This is a conditional sale agreement where you own the vehicle at the end of the agreement, but the regular monthly costs are structured like a standard leasing agreement. As with Finance Lease, you can choose to pay the total costs of the vehicle over the duration of the agreement or reduce the monthly costs by having an agreement with a final “balloon payment”. If you choose a payment profile with a balloon payment, you have to pay this at the end of the agreement and there is no option to return the vehicle to the funder, you must take ownership. The lender will retain ownership of the vehicle until the final payment has been made. Typically, a Lease Purchase will be funded between 2-5 years.
Hire Purchase – This is a funding method used to buy a new or used vehicle. You would normally expect to pay a deposit and thereafter the value of the vehicle in full in equal monthly instalments, for the duration of the agreed loan period. The lender will retain ownership of the vehicle until the final payment has been made.
There is no option to return the vehicle during or at the end of the agreement and payment of the vehicle has to be made in full by the end of the agreement.