Finance Lease Advantages and Disadvantages

Finance Lease advantages and disadvantages

Finance Lease is a popular funding option for commercial vehicles where Contract Hire is not suitable. (Cars can be financed as well)

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

Advantages:

• Minimum capital expenditure 
• Accurate monthly budgeting 
• A fixed interest rate is available on some contracts 
• No damage recharge as you are responsible for 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 generally 100% for commercials (subject to no private use). On contracts with maintenance the service element VAT is 100% recoverable 
• Rentals can be offset against the businesses profits. Cars with a CO2 output above 130g/km are currently subject to a 15% disallowance on the amount of the rental that can be claimed against the businesses taxation, for cars with a CO2 output of 130g/km or below, there is currently no disallowance 
• Reduced administration 
• On-going advice and support 
• Optional maintenance package 
• Optional breakdown rescue cover 
• Optional replacement vehicle cover in event of breakdown 
• Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company 

Disadvantages:

• You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement 
• Operating risk associated with the vehicle 
• Interest rates can vary on some contracts 
• 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)