There are two types of finance lease available to you:
- Fully Amortised
- Final Rental
In both cases you do not have the option to own the vehicle at the end of the lease. Leased vehicles cannot be used for hire and reward purposes such as taxi or chauffeur services.
For this type of Finance Lease you will be charged fixed monthly rentals over a flexible contract period of 2-5 years which covers the value of the vehicle including interest. Some finance providers refer to this type of Finance Lease as ‘Flexi Lease’.
So what are the benefits of Fully Amortised Finance Lease?
- 100% VAT can be reclaimed for commercial vehicles, and for cars where there is no private use.
- For cars that have some private use, then 50% VAT is reclaimable
- No end of contract charges
- No mileage restrictions or end of contract excess mileage charges
- At the end of the rental period you can enter into a secondary rental period with a low monthly lease – often called a ‘peppercorn’ rental, or;
- If the vehicle is being sold, benefit from any potential profits
And what are the potential risks you face?
- You bear the residual value risk of the vehicle as opposed to the finance provider
- Vehicles appear on company balance sheets
- The Road Fund Licence (RFL) fee is only included in the first year of the rental. You will be responsible for RFL payments for subsequent years.
- If the sale value is less than the estimated resale value you may be liable for additional costs.
A Final Renal Finance Lease is very similar to a Fully Amortised Finance Lease. However, the major difference is that this type of Finance Lease allows you to pay lower monthly rentals by deferring some of the rental cost to the end. This final rental (which some customers refer to as a ‘balloon’) settles any outstanding rental costs. Otherwise the benefits and risks outlined for Fully Amortised apply to a Final Rental Finance Lease.
What happens at the end of the contract?
At the end of both Finance Lease contract types:
The vehicle must be sold to an unconnected third party or returned to the finance provider for disposal. You can use the sale proceeds towards the settlement of the residual value and keep any potential remaining proceeds (the finance provider will deduct a disposal fee from the sale proceeds). If the sale value is less than the estimated resale value you may be liable for additional costs.
At the end of a Fully Amortised Finance Lease contract:
You can potentially opt to keep the vehicle for an additional 12 months by entering into a secondary rental period, often known as a “peppercorn rental”. At the end of this secondary rental, the vehicle must be sold.
At the end of a Final Rental Finance Lease contract:
You can continue to pay the agreed month rentals, of which a proportion will be used to reduce the residual sale value. This reduction will be equivalent to the average monthly capital reduction applicable during the primary period of the contract.