The topic of leasing new vans is gaining quite a bit of attention these days, but which is best - buying outright (with or without financing) or leasing? Your circumstances, needs, and expectations will determine the best answer to this question.
When deciding between leasing and buying a commercial van, there are several things to consider. We will define leasing as Business Contract Hire for the purposes of this article (there are other van finance products that may also include the term lease, such as Finance Lease).
In order to buy a new van outright, you will need a large lump sum of cash, especially if you are looking at new models. This is a good option if you have this kind of money and are willing to then keep the van for many years. When you look for a used van for a lower price upfront, there are still risks, such as mechanical issues, and thus ongoing maintenance costs.
Business van leasing doesn't require a big chunk of cash, since the cost is spread out over a fixed period of time, so using a leasing contract for your business vehicle could be a good idea. The initial rental will only be 3 to 12 monthly rentals, depending on what you agree upon. There may be other costs associated with commercial vehicle leasing that are not included in your monthly rental such as damage charges to the van (outside normal wear and tear) as well as excess mileage.
You should consider the van's depreciation when purchasing it outright, especially if you're using a bank loan since you're borrowing money to buy an asset that drops in value almost immediately after leaving a dealership and in total can decrease by 50-60% within the first three years.
The risk is yours but you could also benefit if used van values increase (as they have over the last year).
Lease payments (which are essentially rentals) cover the predicted depreciation costs over the lease term. When you return the van and it's put up for auction, your lease company hopes to get at least the estimated sale value.
The benefit of this is that you will know the whole 'life' cost of the van from the beginning. You won't have to worry if the value of used vans drops but you won't benefit if it increases either.
If you are looking to take full ownership of the van, you might want to consider buying it. In general, when you own a van, you have more freedom because it is your property, and you are free to do whatever you want with it. Additionally, you will not have to worry about excess mileage or damage charges. In case you need cash or if you wish to upgrade your van, you can sell it at any time.
Van leasing is essentially long-term van rental, so the vehicle will never be yours. In return for a monthly rental, you will have the use of the van for an agreed period of time (2 to 5 years) and up to a predetermined mileage. If you like the idea of monthly payments / rentals and don't want to return the van at the end of the agreement, you should consider Business Contract Purchase (BCP) or Business Hire Purchase / Lease Purchase, which are both options that facilitate owning the vehicle via a finance agreement.
There's no need to declare your mileage and you can keep the van for as long as you like when you buy it, but remember that the longer you drive it, the older it becomes, which often means higher maintenance costs or failure at the MOT. You will also miss out on taking advantage of new technologies.
If you have financed the van through a regulated Hire Purchase (HP) or Personal Contract Purchase (PCP) and wish to terminate the agreement early, for example, if you are no longer able to make the monthly payments, you have a right to a "voluntary termination". You'll have to repay (or have already repaid) at least 50% of the Total Amount Payable (not the amount borrowed) before you can walk away. Even if you haven't reached this point, you can still terminate your PCP or HP, but the finance company will invoice you for whatever is still owed to get to the 50% mark.
In addition to the length of time you plan on leasing the van, you will need to specify your mileage allowance - in other terms - how many miles you plan on driving during this time.
There may be an option to extend the lease depending on your lease product and funder, but in general, the van will need to be returned to the lender at the end of the lease period. You'll then have to start over and lease or buy another van.
Once you sign the van lease agreement and your circumstances change - i.e you no longer need the vehicle or can no longer afford the monthly rentals, then the finance company will ask for a financial settlement. The amount of the settlement fee depends on the finder and the agreement type but typically it's 50% of the outstanding rentals.
If you purchase a van, you can drive it as much as you want without having to worry about mileage restrictions. Obviously, as your van covers more miles and the more time it has been on the road, its value will decrease and the less you'll get for it if you decide to sell.
Many people who are tempted by leasing new vans hesitate when asked to declare their annual mileage. If you sign a five-year van lease, how do you know that nothing will change in the future? Mileage changes as the business grows, and who would have predicted the reduced mileage during the pandemic?
Upon reaching the end of your contract, if you've exceeded the mileage the agreement is based on, you will be charged an excess mileage charge on a 'pence per mile' basis. Unfortunately, it's a one-way deal since you won't be refunded for fewer miles - it will only be a bonus for the leasing company.
You might not care about the scuffed alloy wheel or scraped wheel arch, but when you go to sell the van or exchange it for a new one, it will devalue it.
You'll probably have to pay for it either way, though you'll have the option to decide what, if anything, you want to be fixed prior to sale, as well as shop around for quotes.
When the lease company forecasts the residual value of the van (what they expect to sell it for) they assume the van will be returned in good condition. Upon collection from the customer, the van is closely examined, and if there is any damage (beyond wear and tear), you will receive a bill for repairs. The cost could be quite substantial and often non-negotiable. It is worth checking the van before returning it and fixing any damages so you can control how much it costs you.
If you buy a van, you may be able to deduct some or all of the cost from your tax liability. However, the way you do this will depend on how you pay taxes. Traditional accounting may allow you to claim the cost of your new van as a capital allowance. Your accountant will be able to advise you on the best course of action.
You'll need to pay all the VAT upfront if you're buying the van outright. Purchasing a van on finance usually requires you to pay the full VAT as well as a deposit in advance. You'll have to wait until your next VAT return to reclaim it. Purchasing a van on finance usually requires you to pay the full VAT as well as a deposit in advance.
Van owners often dread getting rid of their old vehicles for good reason. You might encounter time wasters or after-sale complaints if you try to sell privately. When it comes to part-exchange, negotiations are common, while "we buy any van" services are most likely to offer less than market value.
Here's where business van leasing truly shines. Your funder will pick up the van on the date you agree and drive it away – that's all there is to it. Unless there are damages or excess mileage charges, you will have nothing left to pay.
If you purchase a van (and repay outstanding finance if funded by the bank), you may use the equity in the van to pay a larger deposit towards a new vehicle and, as a result, reduce your monthly payments. Van owners can also choose to lease their next van. Your current vehicle will have to be sold in this case, but the proceeds can be used to pay for the initial rental on a van lease.
Sometimes customers hesitate to lease a van out of concern that it will be 'money down the drain'. Even though you have no equity at the end of the lease period, it cannot be considered to be wasted money since the rentals are roughly equivalent to the depreciation you'd pay if you purchased the van.
A low initial rental is generally more affordable than a van loan initial payment, but when the lease ends it is important to remember that you have no equity in the vehicle.
While each option has its advantages and disadvantages, we hope you have found this article helpful in choosing which is best for your business van.
If you decide to purchase a van via a finance agreement or lease a vehicle, please contact or visit us at CVC. Click below to discover our unbeatable van lease offers on a wide range of vans suitable for all business needs.
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