Finance LeaseSuitability explanation
Finance Lease (FL) is often used for LCVs (light commercial vehicles) and 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 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 97.5%) 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.
FL may not be suitable for you in certain circumstances. For example:
- If you wish to own or buy the vehicle
- If you might need to change your vehicle early (early settlement will incur charges)
- 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
Benefits of FL
- Low initial outlay and fixed monthly rentals
- On balance sheet
- Choice of period of hire from 2–5 years.
- Optional final large rental to lower the monthly rentals.
- Potential to share in any potential resale profit.
- Damage recharges are avoided as the vehicle although this will affect the future value of the vehicle.
- No excess mileage charges although this will affect the future value of the vehicle.
- VAT on the rental is reclaimable if you are vat registered – 100% on LCVs, 100% on the maintenance element for cars and LCVs, 50% on the finance element for cars (or 100% for cars solely used for business e.g. pool car)
Taking care of the vehicle
- You must ensure the vehicle is comprehensively insured at all times
- You must pay any additional charges that you incur eg parking fine, congestion charge on time. If you don’t do this, the charge will be referred to the finance company who take payment from you for this and for an administration charge that they will make
- You must have the vehicle serviced and maintained in accordance with the manufacturer’s requirements
Failure to make payments in full and on time may result in the contract being terminated and the vehicle repossessed. Only enter in to an agreement if you are comfortable with the financial commitment and terms.