Finance leasing for company cars
Finance leases can be a little trickier to grasp than other company car leasing options. Now might be a good moment to grab some caffeine...
What is a finance lease?
A finance lease is an alternative to contract hire leasing. You pay a fixed monthly rental cost (as you would with contract hire) but what happens at the end of the contract is different. You can:
- Pay a final balloon payment then sell the vehicle on to a 3rd party yourself.
- Pay a final balloon payment then ask the finance company to sell the car.
- Continue the lease by making additional rental payments which reduce the final balloon.
No matter who sells the vehicle, if the sale price exceeds the balloon payment, you can pocket the difference (minus a small fee). The flip-side is, if it comes up short, you'll be paying the shortfall.
What are the benefits?
- Sale control: you can sell the vehicle on with its bumps and scrapes if you want to avoid refurbishment bills.
- There are no excess mileage charges and you can choose to terminate the contract early by paying the outstanding finance amount.
- You have the flexibility to continue using the vehicle at the end of the primary term on an ongoing or fixed-term basis.
- You could make a profit if the vehicle’s resale value is greater than the balloon payment.
- Unlike contract hire, a finance lease does appear on your balance sheet.
- Just like contract hire, you get cash flow control, the latest vehicle models to choose from, maintenance options and VAT benefits (50% on finance rentals and 100% on service rentals).
Is it risky business?
Here's what you should know about finance leases upfront:
- You will have all the risks/rewards of ownership but you never own the vehicle.
- There is always a balloon payment at the end of the contract.
- A resale shortfall is possible. (Contract hire has a more consistent payment plan.)
- The more scuffs/dents there are, the less the vehicle is worth at the point of resale so a shortfall at the end of the contract becomes more likely the more damage there is. It’s your call whether you think that will work out less than potential contract hire refurbishment charges.*
What is a flexible lease?
A flexible lease isn't the same as a finance lease, but it is similar...
Flexible leasing is a variation of finance lease where there is no balloon payment because you spread the cost of that vehicle evenly throughout the contract term.
Is finance lease right for my fleet?
In general, finance lease is a little more expensive per month than contract hire but it’s a useful option for those vehicles that go through a bit of rough and tumble. Finance lease lovers chip, dent and scuff their vehicles - they are grafters who generally have to make a bit of mess to get the job done:
- Industrial and commercial trades: builders, groundworks and removals.
- Estate and agricultural 4x4 drivers: farmers, shooting professionals, off-road drivers and game keepers.
- Potentially messy professions: florists, landscapers, mobile mechanics, chimney sweeps and painter/decorators.
Need more info?
Finance leasing can be confusing but that’s why we’re here.
If you want help understanding the differences between contract hire and finance leasing for your fleet, please get in touch.
* If the vehicle doesn't meet the minimum fair wear and tear return standard.