Lease purchase (hire purchase)
What is it?
Another method of achieving vehicle ownership is hire purchase, which is also referred to as lease purchase for business rentals.
So how does this type of business van finance work? You lease the van with an option to purchase it at the end of the hire term. The agreement may require a three- or six-month deposit at the outset and usually terminates with a balloon payment – typically equivalent to the expected residual value of the van. Both the deposit and the balloon payment can be varied to reduce or increase the monthly repayment amount.
Why would you use lease finance? It’s useful if your company wants to own vans but does not have the capital to pay for them and wants to avoid mileage restrictions. On the negative side you’ll end up owning a van that will be subject to residual value fluctuations.
Lease purchase agreements can be based on a fixed interest rate, so you know how much your business van finance instalments will be each month.
Benefits
- Purchase cost usually Corporation Tax deductible through capital allowances
- Interest on the monthly payments usually Corporation Tax deductible
- You’ll benefit if residual values are good…
Drawbacks
- …and if they’re not you have to bear the shortfall
- Vehicles appear on the balance sheet (if that bothers you)
- Outstanding finance instalments appear as a liability on the balance sheet
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