Finance Lease Explained


This is fast becoming the most popular option for funding new vehicles especially for Sole Traders and smaller businesses. Finance Lease is a very tax efficient option where you choose to pay either the entire cost of the vehicle including interest charges, over an agreed set period of between 24-60 months. You may opt to pay a lower monthly payment with a final Terminal "Balloon" payment based on an approximate resale value of the vehicle which is calculated on a set mileage.

Customers choose Finance Lease for a number of reasons but the main one is that Finance Lease allows the customer and not the finance company to profit from the sale of the vehicle at the end of the agreement. To increase your potential equity at the end of the agreement we recommend setting a sensible final terminal "Balloon" payment set by a realistic mileage usage.

At the start of the agreement the mileage and term are set. Monthly payments and interest rates are fixed. At the end term you may continue to operate the vehicle under a "Peppercorn payment" usually the equivalent to a monthly payment or two but as low as £100 + VAT with some of our funders.

  • Deposits are usually the equivalent of three rentals, but can be any amount whatsoever
  • Repayment period of up to 60 months
  • VAT is paid monthly, then claimed back quarterly (if VAT registered)
  • Rentals are 100% allowable against taxable profits
  • Facility can have a Terminal "Balloon" profile, which defers a large payment to the end of the contract thus reducing monthly rental and aiding cash flow
  • Vehicle sold or part-exchanged at end of contract hirer benefits from between 90-100% of sales proceeds (ex. VAT) dependent on funder
  • Ideal for non-VAT registered business users looking for low initial deposit and maximum flexibility

VAT registered companies, it means paying the VAT monthly, and claiming it back quarterly.

At no time will you take ownership of the asset, and the vehicle must be part exchanged or sold to a third party at the end of the term as the taxman says you can`t have the tax benefits of the lease as well as own the vehicle. Servicing and RFL costs are also your responsibility.

Key Facts of Finance Lease (FL)

Finance Lease - 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 FL

  • Gives business customers use of an asset of newer, higher specification than they could otherwise buy outright
  • 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
  • Portion of initial cost deferred until last month of the contract

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

About Leasewell

About Leasewell

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Leasewell (UK) Ltd can introduce you to a number of finance providers, we may receive a remuneration if you enter into an agreement with them. Leasewell (UK) Ltd is a credit broker and not a lender.
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