A finance lease is an alternative method of financing vehicle either where contract hire is not suitable, where companies want to minimise the risk of charges at the end of the contract, when companies want the vehicle to appear on their balance sheet, or where the tax advantages of finance lease suit the business better than other methods.

Under a finance lease agreement you effectively rent the vehicle for a fixed contract duration with a fixed monthly payment, and a balloon at the end of the contract.

At the end of the contract businesses can either sell the vehicle to a third party and retain most of the profits (if the vehicle is sold for more than the balloon payment), or can pay it and operate under a ‘peppercorn agreement’.

Businesses can opt to have a higher balloon payment and lower monthly payments or can choose to finance the entire cost of the vehicle with higher monthly payments and have a minimal balloon payment at the end of the contract.

Benefits of Finance Lease

• Minimum Fuss – Whenever you take a new vehicle on a finance lease agreement it will be covered by the manufacturer’s warranty and it will be delivered to you! You can also opt for maintenance packages to help budget a fixed monthly payment with no unexpected maintenance costs. 

• Flexible payments – You can pay a higher amount in the first month in order to reduce monthly payments and help with cash flow. Equally you can choose to spread everything equally across the contracted period. Not only this but a finance lease contract can be settled early and as long the vehicle is sold for the same as/more than the settlement fee, there are no early termination costs. 

• Free Up capital – Due to finance lease not requiring a large initial outlay, it can free up capital for the business. This is particularly helpful for companies that own their fleets and want to free up the cash locked in their vehicle assets. 

• Eco-Friendly – Having access to the latest models that manufacturers offer means that there are equipped with the latest green technologies and can help lower a business’ carbon footprint. 

• Latest Technology – Having the latest technology in vehicles will help ensure that your drivers are comfortable, safe, and that vehicles are fit for purpose (Duty of Care risks). 

• Lower Maintenance Costs – Typically having a new vehicle will mean that you have less unscheduled maintenance issues pop up.

Things to remember:

• Final Payment – While you don’t have to worry about excess mileage charges or damage recharges, these will affect the resale value of the vehicle. If the vehicle can only be sold for less than the balloon payment then the business will have to cover the difference. 

• Won’t Own The Vehicle – Although the vehicle appears on the business’ balance sheet it will never be owned by them. 

• When Selling The Vehicle – Assuming the vehicle is sold for more than the balloon payment, the business will retain 98% of the proceeds.