What is a finance lease?
The most popular payment method with our customers, a finance lease is ideal for small businesses and sole traders who can’t pay the full cost of a van upfront. Some companies will also be eligible to reclaim any tax they have paid on their commercial vehicles if they are VAT-registered. The technicalities can be complicated to understand, so we’ll do our best to explain everything.
In a finance lease, the cost of the vehicle is spread out over an agreed period of time — usually 3-4 years — with fixed monthly payments. You can opt to include a balloon payment at the end of your contract, which can lower your monthly payments.
At the end of the agreement, you must sell the vehicle to a third party on behalf of the finance company. If the van is sold for more than the value of the final balloon payment, then you can benefit from the equity. This can allow you to get a new vehicle if you put the equity from the old van towards a lease on a new van. However, if the van is sold for less than the agreed residual value, you will be liable to cover this shortfall.
It is also possible to buy the van back yourself from the third party at the end of the deal.
For businesses, a finance lease can be advantageous. Businesses gain control of a van during the hire agreement, using it as their own while having it on the books as an asset. However, the finance company remains the owner of the vehicle.
What is a balloon payment?
A balloon payment is a pre-agreed sum that is due at the end of a finance-lease deal. While a balloon payment usually enables you to have lower monthly payments during the agreement’s term, it is a sum of money that you must be able to pay off when the agreement is finished. Normally, the sale of the vehicle covers the balloon payment. However, if the van has excessive damage or milage, the resale value may be lower than expected. If what you gain from the sale of the vehicle is less than the balloon payment, you will be liable to pay the remainder.
Our sales team are experts on the finance lease, so they’ll be able to answer any further questions you may have. And of course, we have other van leasing options if a finance lease isn’t for you.
Advantages of a finance lease
- Brand new vehicle
- Low initial payment
- Minimal capital expenditure
- Accurate monthly budgeting with fixed monthly payments
- Option of a balloon payment to lower monthly payments
- Tax can be reclaimed on commercial vehicles* by VAT-registered businesses
- You can keep most of the equity following the sale of the vehicle at the end of your contract
*A commercial vehicle is classed as a vehicle with a weight which is greater than 3.5 tonnes or that is capable of shifting a payload of over a tonne.
Disadvantages of a finance lease
- You don’t own the vehicle
- Operating costs are your responsibility
- Fully comprehensive is the the only accepted level of insurance
- There is a risk of negative equity should you request to settle the agreement early