Finance Lease

Ideal for: Smaller businesses who are able to  manage the resale of their cars

Finance Lease is a flexible leasing product usually only available to businesses.  It gives businesses the option to sell the vehicle at the end of the agreement and keep a large percentage of the proceeds, or arrange an extension to the lease.  But finance leased vehicles cannot typically be purchased outright at the end of the agreement unless the business comes to an arrangement with the lender.  It is common for a Finance Lease to defer a proportion of the credit to the end of the agreement as a ‘balloon payment’.  The balloon payment will be determined by the age and mileage of the car at the end of the agreement.   Where a balloon payment is due to be paid it is not optional under a Finance Lease like it is for Business or Personal Contract Purchase.

VAT implications

A Finance Lease is a lease agreement which means that VAT is charged on top of each monthly rental payment. VAT will also be payable for add-on packages such as service or maintenance agreements.

At the Beginning of the Agreement

The leasing company (lessor) hires the vehicle to the customer (lessee) for an agreed period of time (the primary period of hire) for an agreed monthly sum. The customer will usually pay advance monthly rental payments at the start of the agreement – typically 3 or more rentals are paid in advance.  The rentals will either be spread over the period of the term, or in some cases can be structured to leave a holiday period at the end of the agreement where all the payments have been made earlier.   The latter gives the customer some time to save up funds to make an advance rental or deposit for their next vehicle(s).

At the end of the agreement

There are typically three options customers have at the end of a finance lease agreement:

  • Return the vehicle to the lessor who will sell it and rebate any surplus sale proceeds to the customer as a rebate of rentals.
  • Lessee arranges sale as an agent to a third party.  The lessor receives the full sale value and agrees to provide a fixed percentage of any surplus that is generated as a rebate of the rentals the customer pays.
  • Lessee continues to use the vehicle entering into a secondary period of rental.  But this option is not normally available where there is a balloon payment outstanding.

Advantages of Finance Lease

  • Finance Lease is a flexible product that can be structured in a way which suits the lessee.
  • There is no mileage allowance so the lessee can use the vehicle as much as they like.  However, the more use the lower the car’s value at the end of the agreement.
  • The lessee can receive a percentage of the proceeds when the vehicle is sold.  This can lead to a significant rebate if there is ‘equity’ in the vehicle – where it is worth more at the end of the agreement than what the lessor predicted at the start of the agreement.

Things to remember

  • The lessor owns the vehicle – the lessee can only sell the vehicle at the end of the term unless they come to a special arrangement with the lessor.
  • The agreement can be terminated early but early termination charges are often applied and can be high.
  • The lessee bears both the risks and rewards in terms of how the car depreciates under a Finance Lease.  If the car depreciates significantly more than the lessor originally predicts at the start of the agreement then this can lead to the customer falling into ‘negative equity’ with potentially further funds payable to the lessor at the end of the agreement.
  • Most business finance agreements are ‘unregulated’ which means the same protections are not available for businesses as they are for consumers.

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