Leasing a Car
What is finance lease?

What is finance lease?

Finance Lease has become an increasingly popular method of financing your vehicle, particularly in situations where contract hire is not suitable. Finance lease arrangements are not available to Private Individuals but it is the preferred option with many Partnerships, Limited Companies, Self-Employed and Sole Traders, due to there being substantial tax benefits.

With a Finance Lease agreement, there are usually two different options available to you:

  • You can spread the cost of the vehicle (including interest charges) into fixed monthly instalments over an agreed lease period.
  • Or, you can choose to make deferred payments. Here, you make lower monthly payments with a final payment based on the projected value (commonly known as residual value) of the vehicle at the end of the lease.

Following either of these scenarios, the vehicle is sold and 98% of the sale proceeds will be returned to you.

Please be aware that in a Finance Lease agreement you never actually own the vehicle. At the end of the lease agreement, the balloon payment is given to the finance company and the vehicle is later sold to a third party.

How does Finance Lease work?

At the beginning of the Finance Lease agreement, fair usage limits are agreed for the vehicle and, providing these parameters do not vary, monthly payments (including interest charges) are set for the duration of the contract.

This means that you can take advantage of a fixed monthly rate without the stress that comes with operating risks and administration.

Here is an example of how a Finance Lease agreement works:

Example.com set up a Finance Lease agreement on a BMW 5 Series. Example.com will pay a deposit on the car, and then a choice is made on whether to make fixed monthly payments across the length of the contract or to make a “balloon payment” at the end of the lease.

Finance Lease benefits

Finance Lease, as a vehicle funding option, does have a number of benefits:

  • Small initial outlay with fixed, low monthly payments.
  • 50% of VAT payments can be reclaimed on cars, and 100% of VAT payments can be reclaimed on vans.
  • The vehicle will appear as an asset on your balance sheet.
  • You are able to apply for certain tax allowances.

Finance Lease advice

With Finance Lease agreements, there are several things that you need to know before you sign the paperwork:

  • There are no mileage restrictions, however excess mileage could affect the residual value of the vehicle, and in-turn affect the amount of money returned to you following the vehicle’s sale.
  • The balloon payment amount is impossible to predict due to fluctuations in the used car market, it may be an idea to consult a vehicle depreciation calculator before choosing your vehicle.
  • Due to the fixed term nature of the agreement, it may be difficult, or at least expensive, to terminate a Finance Lease contract early.
  • You will be responsible for the repairs and maintenance of the vehicle, but there is an option to include this as part of your agreement.
  • With the monthly payments being fixed bear in mind that the interest charges will also be fixed. This could prove to be advantageous in times of climbing interest rates.