What is Finance Lease?
You can lease a vehicle with a finance lease contract, which is an agreement between you and a finance company; this agreement allows you to use the vehicle but does not grant ownership of it. You would pay a fixed price each month for an agreed period – at the end of the contract you have a number of options; sell the vehicle and pay off any outstanding payments, keeping whatever profit you make, enter into a secondary period and make payments for that period or finally, re-finance the terminal/final/balloon payment. This is a flexible way of financing your vehicle.
Payment
You will pay an initial rental or deposit at the start of a lease, which could be the equivalent of 1–12 months’ rental in advance, plus the VAT. The lease repayment period is usually between 24 to 60 months. The VAT is paid monthly, then claimed back quarterly (if VAT registered).
Things to know
This type of lease is best for non-VAT-registered business users looking for a low initial deposit and maximum flexibility. No mileage or damage charges are incurred at end of the contract. You can opt for a ‘balloon payment’, which means a lower monthly rental fee, but a large payment at the end of the contract. Rentals are 100% allowable against taxable profits with no private use. Vehicle sold or part-exchanged at end of the contract with the hirer keeping between 95–100% of the sale proceeds (ex. VAT) depending on finance company.
Pros
- Fixed term agreement, great for budgeting.
- Flexible low deposit.
- You can defer a lump-sum payment to the end of the agreement.
- No fixed annual mileage requirement.
- Not liable for vehicle damage.
Cons
- Fixed term agreement.
- Early termination penalty.
- On-balance-sheet finance.
- You must pay the final payment or re-finance it.
- You must sell the vehicle at the end of the term.
