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.
Just like contract hire, you pay a deposit on your finance lease followed by fixed monthly payments.
You have a choice of either:
- 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;
- or paying more each month 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.
If you opt for the second choice and, at the end of the agreement, think there is still plenty of mileage left in the van you can always enter into a secondary rental period. This is often called a peppercorn rental as it costs very little. But with finance lease you never own the van.
Finance lease is a very popular choice for VAT registered companies as they can generally claim back 100% of the VAT on commercial vehicles (subject to no private use).
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;
- 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
And what are the downsides to finance lease?
- You will never own the vehicle as 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;
- Interest rates can vary on some contracts;
- You need to ensure the payments are structured to meet your cash flows so they pay off the van.