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What is Finance Lease?

Finance Lease is and has been a popular and increasingly sought after funding method for business vehicle users.

(Especially Commercial Vehicles)

Finance Lease is a vehicle hire agreement: –

It offers a flexible and cost efficient way to gain the use of a vehicle whilst spreading VAT across all of the rental payments over the contracted period.
Finance Lease is a finance product specifically for business users. You take control of a vehicle for a predetermined period for an agreed maximum contract mileage with fixed monthly rentals. The agreement features a Residual Value that is based on the period of the lease and your anticipated annual mileage.

What happens at the end of the deal?

At the end of the agreement the vehicle is sold to a third party on behalf of the finance company. With some finance companies, If the proceeds of the sale are more than the Residual Value then the finance company will refund a percentage of the proceeds back to the hirer – (normally 95 to 97.5%). VWFS don’t this but other other finance companies do.
If the proceeds from the sale are lower than the Residual Value then the hirer will be liable to make a further payment to the finance company.
Finance Lease is NOT an ownership agreement: –
You are responsible for the disposal of the vehicle at the end of the contract.
This can be done by selling the vehicle yourself or putting the vehicle in part exchange.
If the sale value of the vehicle exceeds the final Balloon Rental or Terminal Rental payment – *you obtain the equity, If the achieved sale value of the vehicle is less than the final Balloon Rental or Terminal Rental payment, You are liable for any shortfall.

Benefits of a Finance Lease:

• Low initial outlay especially if not VAT registered – compared to other funding methods.
• Minimal Capital expenditure
• Fixed Monthly Rental Costs for accurate monthly budgeting
• The flexibility of using a balloon payment to reduce your monthly rentals if required
• Lease Periods from 24 months (2 Years) up to 60 months (5 Years)
• Initial Rental – Monthly Rentals & Final Balloon Rental are up to 100% tax deductible
• No need for you or your business to be VAT Registered
• Ability to gain up to 100% of the vehicle sale equity at the end of the contract
• The possible ability to settle the agreement early
• *No excess mileage charges or reconditioning charges at the end of the contract
(*Excess Mileage and damage to the vehicle will affect the sale value of the vehicle at the end of the contract)
Concerns: –

What is a Balloon Figure?

Final Rental ‘Balloon’ Payment: The liability for the final rental remains with you – If you damage the vehicle through misuse or exceed the anticipated mileage then this could have a negative effect on the resale / PX value the vehicle will attract at the end of contract – If the market for your vehicle fluctuates and the sale value achieved is less than the final rental – You are liable to make up the shortfall.

Things to note:

Running Costs: The running costs for the vehicle are your responsibility, Please take this into consideration when looking at a Finance Lease. Maintenance, Servicing and ‘Wear & Tear’ of the vehicle is your responsibility.

Negative Equity: Should you request to settle the agreement too early – There is a risk of negative equity.
You will never own the vehicle: The vehicle must be sold to a third party at the end of the agreement.

Insurance: You must have fully comprehensive motor insurance.