FINANCE lease is often called long-term contract hire – although this is not the case.
But finance lease is popular with many in the ‘dirty’ trades and many van operators because it comes with all the benefits of outright ownership, but many of the cash flow and VAT advantages of contract hire.
So although you get to operate a van on finance lease, you never get to own it.
Just like contract hire, you pay a deposit on your finance lease followed by fixed monthly payments. These payments will cover the cost of the van.
You have a choice of:
- going for lower monthly payments followed by a large payment at the end of the lease – the balloon payment – which is normally covered by the sale of the van (this can be done by you on behalf of the leasing company, or you can let the leasing company do it on your behalf). However, if the sale price falls short of this ‘balloon’ or estimated final value, you are still liable for the balloon – so that will have to be paid;
- or paying more each month to cover the cost of the van and then getting back up to 95 per cent of the van’s value when it is sold in the form of a rebate from the van lease rental company.
There is also the possibility to enter into a secondary rental period if all the van finance payments have covered the cost of the van and think there is still plenty of mileage left in the van. This is often called a peppercorn rental as it costs very little.
Finance lease is a very popular choice for VAT registered companies as they can generally claim back 100% of the VAT on the finance payments. But because VAT is only paid on the rentals, it also suits non-VAT registered trades and small businesses, too.
Finance lease is also useful for those trades considered ‘dirty’ – builders, plasterers and so on, where the van may well gain many knocks, bumps and spillages during its use. Because unlike contract hire, there are no vehicle conditions – with potentially costly rectification costs – when you hand the van back.
Finance lease: what are the advantages?
- Minimum capital expenditure;
- You only pay VAT on the finance payments, not the cost of the van; so useful for non-VAT registered trades
- Accurate monthly budgeting;
- A fixed interest rate is available on some contracts;
- No damage recharge as you are responsible for disposal of the vehicle;
- Reduced administration;
- Optional replacement vehicle cover in event of breakdown;
- You take the risk on the residual value of the van – so van condition remains important – and it could be more than you were anticipating (happy days!)
And what are the downsides to finance lease?
- You will never own the vehicle as usually the vehicle must be sold to a third party at the end of the agreement;
- But you do get all the operating risks associated with the vehicle;
- Early termination could be costly
- Interest rates can vary on some contracts; normally though these are fixed
- You need to ensure the payments are structured to meet your cash flows so they pay off the van cost;
- You take the risk on the residual value of the van – so van condition remains important – and it could be less than you were anticipating