0345 811 9595

Monday to Friday 9am to 5.30pm

What is finance lease?

Finance lease is a popular agreement for businesses needing cars, vans and commercial vehicles where contract hire is not suitable. It offers flexibility and tax advantages to eligible companies who require one or more vehicles but don’t have the accessible funds to pay for them up front.

As part of a finance lease agreement you can choose to pay either the entire cost of the vehicle, including interest charges, over an agreed period. Alternatively, you can opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle (otherwise known as the ‘balloon payment’). Throughout the agreement, the vehicle remains the property of the leasing company.

This type of agreement is only available to business customers – including limited companies, self-employed people and sole traders; it is not available to private individuals. It is a particularly popular option for businesses because of the significant tax advantages (continue reading for more information on this).

NB: Nationwide Vehicle Contracts are specialists in Contract Hire and Personal Contract Hire agreements. While Business Finance Lease agreements are no longer available with Nationwide Vehicle Contracts, it is important that you review the benefits and exclusions of every lease contract to better understand which agreement is best suited to your needs.

How could it work for your business?

If your company chooses to take out a finance lease on a brand new vehicle, you will be hiring it for a specified period of time (two or three years, for example) and make regular monthly payments to rent it.

Your business will be able to use the car or van without facing the high upfront cost of a new vehicle, handle the administration of the vehicle, and have the assets show on your company’s balance sheet.

At the beginning of the lease, usage parameters for the vehicle are agreed. Providing these restrictions are met, monthly payments and interest rates are fixed for the duration of the contract.

If yours is a VAT registered company, you can reclaim between 50% and 100% of the VAT payments depending on whether you are renting a car or commercial vehicle. If your company is not VAT registered, you can choose to spread the VAT costs across the term of the lease by incorporating it into your monthly rental.

Your payments can normally be offset against taxable profits (special rules apply to cars)

At the end of the contract the vehicle can either be sold by the user to an unrelated third party (some funders may handle the disposal in return for a small commission) or alternatively, the user can pay the outstanding “balloon payment” and operate the vehicle under a peppercorn agreement.

Video: finance lease explained

For a brief but clear overview of finance lease and how it works, watch the video below.

The key features of finance lease

  • Popular for business and commercial customers when contract hire is not suitable
  • Allows your company to handle the administration of your vehicles, and have the assets show on your balance sheet
  • Choose to pay the entire cost of the vehicle, including any interest charges, on a monthly basis or
  • Pay lower monthly instalments with a final payment based on the resale value of the vehicle at the end
  • At the end of the agreement, the vehicle is either sold to a third party or
  • Pay the outstanding balloon payment and operate the vehicle under a peppercorn agreement

The key benefits of finance leasing

  • Fixed payments for the whole agreement
  • Low up-front costs – for just a small outlay, you can use the assets immediately
  • Claim up to 50% of the VAT on cars and 100% on commercial vehicles (subject to being VAT registered)
  • Flexible repayment structure tailored to match your company’s cash flow
  • Fixed or variable interest options – you decide which suits you best
  • Tax advantages – VAT is payable on the rentals, not the purchase price, while payments can normally be offset against taxable profit (special rules apply to cars)
  • No penalty charges for additional mileage or damage at the end of the agreement
  • Although you will not own the vehicle, you will receive 98% of the sale proceeds if the vehicle is sold to a third party at the end of the agreement

What happens at the end of the contract?

At the end of the lease, the vehicle can be sold to a third party, allowing your company to benefit from any available equity if it is sold for profit. If the sale price is below the agreed residual value, you will be liable to make a further payment to the finance company.

Alternatively, you can choose to pay the outstanding balloon payment and operate the vehicle under a ‘peppercorn agreement’ – otherwise known as a secondary rental agreement.

Finance lease case studies

Case study:

John Smith is a sole trader working as a plumber. He takes out a finance lease agreement on a Citroen Relay.

The contract:

  • Duration: 48 months
  • Annual mileage: 12,500
  • Initial rental: £678.09 + VAT
  • Monthly payments: £226.03 + VAT
  • Final payment: £6,054.75 + VAT

The business chooses to pay lower monthly payments and agrees a balloon payment amount based on the anticipated resale value of the Citroen Relay. As his is not a VAT registered company, VAT payments are made as part of the monthly instalments.

At the end of the contract, Mr Smith chooses to pay the outstanding balloon payment and continue to use the vehicle under a peppercorn agreement.

Please note: case studies created for illustrative purposes only.

If your business is looking to lease a car or van, search our huge catalogue of brand new vehicles, or call our specialists on 0345 811 9595 to discuss the options available to you.


Top