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Finance Lease for Cars
What is Finance Lease for Cars?
Finance lease is a payment plan for businesses looking to hire a car for a set term without needing to pay any upfront costs. It’s an alternative to business contract hire and there can be tax advantages for the business, too.
With a finance lease plan, the business leases a vehicle from the lender and pays fixed monthly rentals over the agreed length of the contract, which can vary from 24 to 60 months. The business can choose to pay for the full cost of the vehicle, spread over the length of the agreement, or opt for lower monthly costs by paying for part of its value – with a final, ‘balloon’ payment at the end.
While the business doesn’t own the vehicle, it can include the car – or cars, if the business has more than one – as assets on its balance sheet. Providing the business is VAT registered, it can also reclaim some of the VAT on monthly payments – up to 50% on cars.
A car finance lease doesn’t usually have the same annual mileage allowances to stick to and there’s less of a strict maintenance schedule. Of course, you’ll want to keep the vehicle in good working condition but there isn’t the same requirement to return it in exactly the same condition as when the lease agreement started.
Finance Lease Deals
How does Car Finance Lease work?
A finance lease agreement is only for business customers – not for personal use – though there’s no restriction on the type or size of the business. A sole trader can have a car finance lease.
With a car finance lease, a business hires the vehicle for an agreed period, typically for a minimum of 24 months up to 60 months. An initial rental payment is required, which is usually the equivalent of three monthly rental payments. Monthly payments will be fixed, and must be paid for the duration of the schedule.
There might be some mileage usage limits put in place, but these are less common with a car finance lease arrangement than a business contract hire plan.
If you exceed mileage limits with business contract hire, you may be charged for doing so.
With a finance lease, you may not be – though check the terms of your agreement with your lender. However, mileage has an impact on the value of the vehicle.
If you’ve clocked up 100,000 miles after four years, it will be worth less than if you’ve driven it for 40,000 miles. This is something to think about, given you have responsibility for the vehicle at the end of the term.
Steps for a Finance Lease Agreement
Steps for a Finance Lease Agreement
Finance Lease Agreement
What happens at the end of the Finance Lease Deal?
When the finance lease deal comes to an end, the business can sell the vehicle to a third party, in order to settle the final balloon payment.
When the vehicle is sold and the balloon payment is paid off, the business keeps the rest of the proceeds – which can be used towards funding the next lease vehicle.
There is another option. If the business wants to retain the use of the car at the end of the agreement, it can settle the balloon payment and then continue to lease it under what’s known as a peppercorn rental, or peppercorn agreement.
A peppercorn agreement is a secondary lease plan, which usually sees the business paying a nominal annual rental fee, plus VAT.
There may also be an option to purchase the car by settling the balloon payment, but this only becomes available at the end of the lease period.
Read more about car finance deals at Dick Lovett here.
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