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Finance Lease explained

Leasing a commercial vehicle is a great way to upgrade your company’s vehicle fleet. However, there are a lot of van leasing options to choose from, so figuring out which lease product is most suitable for your business can sometimes be a bit overwhelming. We recognise that every company is different and that what fits one company like a glove may not be right for the next. Finance Lease is one of these products, and it’s important to understand exactly what your agreement means before you enter into it.

What is a Finance Lease?

A Finance Lease is a financial agreement between your company and the funder. This agreement allows you full use of the vehicle while showing it as an asset on your balance sheet. Your company will take on all ownership rights to the vehicle, but will never own it. Finance Lease is not available for private individuals and can only be taken on by limited companies, sole traders or partnerships. It’s the ideal product for businesses looking to have full use of the latest vehicles without spending a huge amount of time and money on deposits and administration.

We are able to offer full vehicle maintenance, including routine servicing, breakdown recovery and tyres.

How do Finance Lease payments work?

As with van Contract Hire, you will pay an initial rental in the first month of your agreement which is usually equivalent to three monthly rentals. To keep your monthly rentals lower over the term you can opt to pay a higher initial rental of six, nine or twelve rentals upfront.

Depending on how you want to manage your payments, you can take a Finance Lease agreement with or without a final rental. If some of the rental is deferred until the end of the agreement, the monthly rental will be reduced accordingly. A final rental price (referred to as a balloon payment) will be determined based on the estimated resale value of the vehicle at the end of the term, after having completed the projected mileage that was agreed upon at the start of the contract. Because of this, it is very important that you give the most accurate prediction of mileage as possible when speaking with your vehicle supplier.

What happens at the end of a Finance Lease?

At the end of the Finance Lease there are two options. The first and most common is that the vehicle is sold on to a third party, either by yourself or by the funder. If you sell the vehicle on behalf of the funder, you will keep a percentage of the proceeds from the sale – typically around 97.5%, although this figure varies from funder to funder. If the funder sells the vehicle you will be charged a nominal fee for this service and retain a percentage of any proceeds minus this fee. The final rental will be settled with the funder with money from the sale of the vehicle, so if the actual resale price is less than the final payment you will be liable to cover the shortfall.

The second option is what’s known as a peppercorn rental – you can agree to lease the vehicle for a further year for which the funder will charge you an annual fee usually equivalent to one monthly rental. Again, the exact costs of a peppercorn rental will vary from funder to funder so if you’re thinking of taking this route, check the costs.

What are the benefits of a Finance Lease?

If Contract Hire is unsuitable for you because you work in an industry where your van will be exposed to heavy usage and you don’t want to risk harsh end of contract damage penalties, Finance Lease should be something to consider. As the vehicle is sold on to a third party at the end of the agreement, you are not subject to penalties for any damage to the van – however dents and scratches will affect the resale value of the vehicle, so be aware of this when it comes to settling your final rental.

Further benefits include:

  • Potential for profit – if the vehicle is sold for more than the value of the final rental, you will keep a high percentage of these proceeds
  • Flexibility – option to pay the entire cost over the monthly rentals or to defer a large chunk of rentals to the end of the contract
  • Asset – you are able to list the vehicle as an asset on your balance sheet
  • VAT reclaim – you can reclaim up to 100% of the VAT on monthly rentals
  • New vehicles – gives you access to the latest vehicles
  • Low initial payment – as little as three monthly rentals upfront

What about the downsides?

As with everything in life, Finance Lease does have its disadvantages for certain companies. You will never own the vehicle as part of a Finance Lease agreement, as it must be sold at the end of the term. You are also responsible for a Road Fund Licence after the first year, and in most cases, you will be responsible for maintenance and servicing the vehicle too.

Is Finance Lease a right van leasing option for your business?

Finance Lease is a great option but might not work for every business so if you have any questions, don’t hesitate to contact us. We offer free advice and no-obligation quotes.

Take a look at our top commercial vehicle leasing deals, including a range of business vans and company cars.


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