What is a Finance Lease?
A finance lease is a method of financing an asset through regular monthly payments with a minimal upfront cost.
The vehicle is ultimately owned by the finance company and then hired out to you.
The first payment in a finance lease can be as low as 1 month's rental although it can be more which will give the benefit of lower monthly payments.
All monthly payments are subject to VAT. This differs from Hire Purchase, where you pay all the vehicle’s VAT in one go at the very beginning.
There are also options for a balloon at the end, which we’ll explain later on. Because you don’t own the vehicle, there are a couple of things that can happen at the end of your lease: You can act as an agent for the finance company and arrange for the sale of the vehicle to an independent third party.
The finance company receives the full sales proceeds and refunds you a fixed percentage of the surplus. You can extend the period of the lease by way of a peppercorn rental, on a low-cost yearly basis.
Pros and Cons
Finance leases are great because they offer a lot of flexibility. You can build up equity in the vehicle without owning it. With multiple options at the end of the contract, it offers a great deal of choice for what you do after the lease has ended.
The monthly rentals are also up to 100% tax deductible and the addition of a balloon can reduce the monthly payments.
A balloon is a figure agreed with the finance company at the start of the lease that should reflect the value of the vehicle at the end. Finance leases aren’t so good if you’re looking to own the vehicle as the van will be owned by the finance company that leases it to you.
If you choose to take a balloon payment, there is always the risk the value of the vehicle won’t be as much as the balloon, meaning you might have to pay extra instead of getting some money back.
Finance Lease Vs Hire Purchase: What’s Right For You?
What is a Hire Purchase?
Hire Purchase is another type of asset finance that you’ll see when you shop around for vehicles.
Similarly to finance lease, you’ll pay monthly; however, after the very last payment and the option to purchase fee, the van becomes yours. You might also see this called Lease Purchase elsewhere but it’s the same thing, just with a different name.
The very first payment in a hire purchase will be at least the full VAT of the vehicle - sometimes plus another 10%, though it’s possible to pay more initially to reduce your monthly payments. For this reason, hire purchases can work well for VAT registered companies who are able to reclaim the tax back.
It’s worth mentioning while we call it an option to purchase fee, not doing so means you don’t get the vehicle, or any of the benefits of the sale like you would in a finance lease.
It’s also a small figure, so if you do decide you no longer want the van, the van is yours to sell or part exchange for a newer model once the option to purchase fee is paid.
Pros and Cons
Hire purchase agreements are really good for those who want to own their vehicle.
The monthly payments aren’t subject to VAT either as it’s all been paid in the beginning. On the contrary, owning the vehicle may prove troubling if you decide you don’t like it. As you’ll be fully liable for it. Because the VAT is all upfront too, it’s more costly to start the finance.
E-Van Leasing Ltd. Registered Office: Agriculture House, 1 Moss Lane, Skelmersdale, WN89TL
Registered in England No: 07567558, E-Van Leasing Ltd are a credit broker and not a lender, we are authorised and regulated by the Financial Conduct Authority (FCA) for credit broking activities. Our registration number is 931955. Website by XL Marketing