A Finance Lease is a form of flexible leasing to fund the use, but not the ownership, of a vehicle and is ideally suited to VAT-registered businesses. The leasing company hires the vehicle to the customer for an agreed period of time for an agreed monthly sum. Similar to business contract hire, annual mileage is required if calculating these rentals.
A Finance Lease often requires, or provides an option for the customer, to sell the vehicle as an agent of the leasing company at the end of the agreement and the customer will retain a percentage of the sale price. This is agreed in advance with the leasing company.
Lets look closely at how this product works:
A Finance Lease is a form of flexible leasing to fund the use, but not the ownership, of a vehicle and is ideally suited to VAT-registered businesses. The leasing company (lessor) hires the vehicle to the
customer (lessee) for an agreed period of time (the primary period of hire) for an agreed monthly sum. Finance Lease agreements can be regulated or unregulated under consumer credit legislation. This all
depends on the type of customer and the total amount of the rentals.
A Finance Lease transfers the majority of the “risks and rewards” of ownership to the lessee/customer.
There are 2 main differences between a Finance Lease and Contract Hire (also known as an Operating Lease) agreement.
A Finance Lease can be structured with or without a balloon payment.
A contract hire agreement takes into account a residual value, which is set by the leasing company. This value is not visible to the customer, nor is it their responsibility
A Finance Lease often requires, or provides an option for the customer, to sell the vehicle as an agent of the leasing company at the end of the agreement. Under a Contract Hire agreement the customer will always hand the vehicle back to the leasing company.
Rentals in a Finance Lease are based on interest being added to the invoice price of the vehicle, excluding VAT
The balance (less any balloon payment) is paid over a fixed period
All rentals are excluding VAT and for businesses only
Advance Rentals are usually paid at the start of the agreement with the exact amounts agreed by the leasing company and the customer.
The most common amount is three advanced rentals (3x)
Fees may be charged for administration and arranging the agreement
Regular Rentals are "spread" over the remainder of the primary hire period. Service and Maintenance packages can be incorporated into the cost, providing customers with fixed cost motoring and will cover the customer in the event of problems with the vehicle which may need repairing etc
Balloon Payment at then end of a Finance Lease may also be included.
End The Agreement
A Finance Lease can be settled at any point during the term (although sometimes only after the first 12 months).
However, penalties for doing so can often be high: details will be set out in the terms and conditions of the agreement
At the end of the primary period of the agreement, the customer must have fully paid all the rentals, including any balloon.
The customer then has three options:
Return the vehicle to the Leasing company; who will sell it and refund any surplus sale proceeds to the customer as a rebate of rentals
(this figure is usually around 95% of the surplus sale proceeds
with some of the surplus being retained by the Lessor to cover
administration costs). If the value of the vehicle is in negative
equity (only likely to happen if there is a balloon) then the
customer is liable for any shortfall.
The customer can act as an agent of the leasing company and arrange for the Sale of The Vehicle to an `independent third party`. The customer receives the full sale proceeds and refunds the Lessee
a fixed percentage (as above) of any surplus that is generated
as a rebate of rentals.
The customer can Continue To Use The Vehicle for as long as
they want on payment of an annual secondary period rental
(commonly known as a peppercorn rental). This is normally
the equivalent of one monthly rental. This option is not
normally available where there is a balloon rental payable.