Finance Lease - Suitability explanation
Finance Lease (FL) is often used for LCVs (light commercial vehicles) and is a fixed term rental agreement where the vehicle remains the property of the finance company and you have the use of the vehicle. You will pay an initial rental followed by subsequent monthly rentals and sometimes followed by a larger final rental which will be based on the expected value of the vehicle. Rentals are subject to VAT. Finance Lease (FL) differs from Contract Hire in that at the end of the agreement you must sell the vehicle to a third party. You (the Lessee) will receive a large proportion (usually 97.5%) of the sale price (less the final rental if applicable) with the balance of the sale proceeds (usually 2.5%) being paid to the finance company (the Lessor). If the agreement has a large final rental and the sale price is less than the final rental, you will be required to make up the difference.
Finance Lease may not be suitable for you in certain circumstances, for example:
- If you wish to own or buy the vehicle
- If you might need to change your vehicle early (early settlement will incur charges)
- If you would like to shorten your period of hire by pre-paying
- If you want to lower your monthly rentals by including a final rental and do not know what your predicted mileage will be
- If you are concerned about the risk in loss of future value/depreciation
- If you plan to export the vehicle or use abroad for extended periods
Benefits of Finance Lease:
- Low initial outlay and fixed monthly rentals
- Road fund licence is only included for the first year
- On balance sheet
- Choice of period of hire from 2–5 years.
- Optional final large rental to lower the monthly rentals.
- Potential to share in any potential resale profit.
- Damage recharges are avoided as the vehicle although this will affect the future value of the vehicle.
- No excess mileage charges although this will affect the future value of the vehicle.
- VAT on the rental is reclaimable
Taking care of the vehicle and your responsibilities:
- You must ensure that the vehicle is always comprehensively insured.
- You must pay any additional charges that you incur for example a parking fine or congestion charge on time. If you don’t, the cost and/or fine will be issued to the finance company who will invoice this to you together with an administration charge that they will levy.
- You must have the vehicle serviced and maintained by a main franchised dealer in accordance with the manufacturer’s recommendations and keep it roadworthy. You may add a cost-effective maintenance package which will cover routine servicing, maintenance costs and tyres, subject to fair wear and tear plus breakdown assistance to enable easy budgeting and give you fixed cost motoring. If you include a maintenance package please note the funder may decline to settle any charges if the total mileage on the agreement is exceeded.
Failure to make payments in full and on time may result in the contract being terminated and the vehicle repossessed. Only enter into an agreement if you are comfortable with the financial commitment and terms