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What is Finance Lease?

Finance Lease is a popular funding option for commercial vehicles where Contract Hire is not suitable. Commercial leasing for cars is also a finance leasing option as well.

Your business uses the vehicle while paying a rental fee 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, which is the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account, plus interest.


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Advantages of Finance Lease:
  • Minimum capital expenditure
  • Accurate monthly budgeting
  • No damage recharge as you are responsible for the disposal of the vehicle
  •  Finance lease is a very popular choice for VAT registered companies as they can claim back 50% of the VAT on the finance element for cars and 100% for commercials
  • Rentals can be offset against the businesses profits
  • Reduced administration
  • On-going advice and support


Disadvantages of Finance Lease:
  • You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement, you keep 98% (in most cases of the vehicle equity value)
  • Operating risk associated with the vehicle
  • You must have fully comprehensive vehicle insurance


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).


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