Lakeland Fleet Management

Finance Lease Cars, Vans & LCVs For Business: A Suitable Option?

Finance Lease is a popular funding option for commercial vehicles, vans or cars where Contract Hire is not always suitable or the best option.

Your business uses the vehicle while paying a rental rather than a repayment. The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the finance lease and the residual value (the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account), plus interest.

LCV, Van & Car Finance Lease Explained

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 the expected value of the vehicle. 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.

Finance Lease Vans or Business Vehicles May Not Suit Your Circumstances. For example:

You are obliged to dispose of the vehicle at the end of the vehicle finance lease period, so you can not own or buy the vehicle. If there's a possibility that you might need to change your vehicle early, you will be liable for high early settlement charges.

Its not a good choice if you want a way to lower your monthly rentals by including a final rental payment and you do not know what your predicted mileage will be. If you are concerned about the risk of loss of future value or depreciation, LeaseYourNewCar.Co.UK would not recommend this plan for you. It's not a suitable arrangement if you need to export the vehicle or use it abroad for extended periods.

Disadvantages:

  • You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement
  • Operating risk associated with the vehicle ios carried by you
  • Interest rates can vary on some contracts
  • You must have fully comprehensive vehicle insurance
  • Road fund licence is only included for the first year

Benefits of Business Vehicle Finance Lease:

The best van finance lease deals can offer a low initial outlay and fixed monthly rentals. The vehicle is on the business' balance sheet. You can have a choice of hire periods of 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

Advantages:

  • Minimum capital expenditure
  • Accurate monthly budgeting
  • A fixed interest rate is available on some contracts
  • No damage recharge as you are responsible for disposal of the vehicle
  • Finance lease is a very popular choice for VAT registered companies and businesses as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use). On contracts with maintenance the service element VAT is 100% recoverable
  • Rentals can be offset against the businesses profits. Cars with a CO2 output above 130g/km are currently subject to a 15% disallowance on the amount of the rental that can be claimed against the businesses taxation, for cars with a CO2 output of 130g/km or below, there is currently no disallowance
  • Reduced administration
  • On-going advice and support
  • Optional full maintenance package with breakdown rescue cover
  • Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company

More Information on Finance Lease:

Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee.

Most finance lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the finance lease with a secondary rental (sometimes called a peppercorn rental).

Taking care of the vehicle:

You must ensure that the vehicle is always comprehensively insured. You must pay any additional charges that you incur for example a parking fine or congestion charge on time. If you don’t, the cost and/or fine will be issued to the finance company who will invoice this to you together with an administration charge that they will levy. You must have the vehicle serviced and maintained by a main franchised dealer in accordance with the manufacturer’s recommendations and keep it roadworthy. If you do not service and maintain the vehicle, the funder will make a charge when the vehicle is returned as this will affect its value. You may add a cost-effective maintenance package which will cover routine servicing, maintenance costs and tyres, subject to fair wear and tear plus breakdown assistance to enable easy budgeting and give you fixed cost motoring. If you include a maintenance package please note the funder may decline to settle any charges if the total mileage on the agreement is exceeded. Failure to make payments in full and on time may result in the contract being terminated and the vehicle repossesed. Only enter in to an agreement if you are comfortable with the financial commitment and terms.