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What is Finance Lease?

By Stephen Turvil | January 11, 2023


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Finance Lease explained: what is it, finance example, what happens at the end of the contract?

What is Finance Lease?

Finance Lease: What Is It?

Finance Lease is a business-only plan for obtaining a vehicle. The typical customer is a VAT registered company but a non-registered sole trader or partnership can benefit too. Terms vary between providers so each plan has to be considered on merit - but there are trends. A vehicle is leased over a set period and there is no option to purchase. Furthermore, it can appear on a business's balance sheet as a leased asset with a corresponding liability, and VAT might be reclaimable. Terms include a low initial outlay – which makes it accessible to a business without a lot of capital – and the set payments help the business plan its future expenditure.

Finance Lease: How Do The Payments Work?

Finance Lease comes in 2 forms. A Residual Value plan incorporates fixed monthly payments then - at the end of the contract – a balloon payment. The latter is set before the contract starts. Its purpose is to defer some of the cost to minimise the monthly commitment. Payments are defined by the cost of the vehicle, the length of the plan, the predicted mileage, and probable value when returned. A Fully Amortised Lease, in contrast, requires the customer to pay the entire cost of the contract though instalments. There is no balloon payment to minimise the monthly expenditure. 

Finance Lease: What Happens At The End Of The Term?

A Finance Lease can – again, depending on its specifics – conclude in a variety of means. The first is to return the vehicle with nothing further to pay (assuming terms and conditions have been met). It is then sold to a third party and the customer might receive a meaningful percentage of the price. Alternatively, the customer might retain it for a longer period by starting a secondary lease. The commitment might be annual or monthly. Either way, the plan is likely to cost less than its predecessor in recognition of the vehicle's lowered value. Finally, the customer might sell on behalf of the provider then retain some of the value. 

Finance Lease: Additional Notes

  • Finance Lease typically incorporates a fixed interest rate.
  • In certain circumstances, rental payments are allowable against taxable income.
  • There might be no mileage limitation – although excessive mileage can impact upon the resale value.
  • Finance Lease might include excise duty for the first year (road tax).
  • It can be expensive – but not impossible – to terminate a finance plan of this nature early.
  • Finance Lease provides the customer with access to a vehicle that might otherwise be unaffordable.

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