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Contract Hire and Leasing Guide


Finance Lease
All Vehicle Contracts Contract Hire and Leasing Guide - Finance Lease
  • Vehicle Finance leasing for business

    Leasing is not a new concept and exploded on to the scene as a method to finance railway stock in the 1800’s. Leasing is now corporate America's biggest external source of equipment finance that is used to fund everything from photo copiers to power plants, aircraft, helicopters, to offshore drilling rigs, telecom equipment and of course vehicles.

    Here in the U.K. leasing is a cost-effective option of acquiring a new vehicle, suitable for all types of small and large companies and partnerships that are VAT registered. Leasing in the U.K. is also a popular method of funding big ticket assets such as aircrafts and specialized commercial vehicles.

    If you fall into this category then vehicle leasing could be well worth your consideration. Vehicle lease agreements in the U.K. are popular for all vehicles, but in particular those that depreciate quickly, such as vans and hardworking commercial vehicles or high mileage cars.

    Lease agreements allow use of a vehicle without ownership, but still offers the return of all the asset value achieved from the sale, or the majority of the sale proceeds less a percentage to the finance companies in some instances.  

    Advantages of Finance lease
    • Affordable, fixed cost method of acquiring a new vehicle that can be tailored to suit your monthly budget and annual mileage, making budgeting easier and straightforward.
    • Fixed repayments over a period and on the exact vehicle that suits you.
    • Low initial outlay, contract hire allows you to choose your own initial payment and lease term which is usually between 24-60 months.
    • Savings for VAT registered customers - 50% of the VAT is reclaimable on the monthly rental, with 100% reclaimable on commercial vehicles.
    • Profit from the sale proceeds or the majority of the sale proceeds less a percentage to the finance companies in some instances.  
    • Easy accounting and tax effective method of vehicle funding. Vehicle lease payments are classed as rentals and can be offset against tax in full or part dependent on the vehicles use.
    • Finance companies (the lessor) offer beneficial rates to encourage lease transactions, as they benefit from written down allowances as the vehicle owners; this results in a low cost funding method. The customer (lessee) benefits from the tax benefits of a rental.
    • The finance company (the lessor) finances the vehicle less the VAT. This lowers the balance financed passing on a more cost effective monthly payment profile offering better cash flow and cost method of acquiring a new vehicle, that can be tailored to suit your monthly budget and annual mileage, making budgeting easier and straightforward. 50% of the VAT is reclaimable on the monthly rental, with 100% reclaimable on commercial vehicles.
    Jargon explained
    • Finance Lease - Finance Lease is usually subject to a Residual value, or sometimes referred to as a balloon payment, or final rental payment.
    • Residual Value - essentially this is a percentage of the total vehicle cost; this payment reduces monthly payment outflow and is structured so that the vehicle's value covers the residual value.

    Finance Lease agreements are not subject to mileage restrictions. The customer is referred to as the lessee and is responsible to the Finance Company, the Lessor, for the residual value amount. It is also usual to have a nominal residual value; this is classed as a fully amortized lease.

    The finance companies (Lessor) will only allow conservative residual values, to safe guard their asset and your interests, our systems offer pre-calculated final payments based on milleage inputted.

    What happens at the end of a Finance Lease?

    The customer, or lessee, arranges the sale of the vehicle on behalf of the finance company (the lessor), the owners of the vehicle.  The lessor arranges the invoice and receives the funds from the sale.

    Profit from the sale is refunded to the lessee classed as a refund of rentals, as per the terms of your agreement. If you part exchange the vehicle, it is normal for the dealer to complete the sales agreement direct with the finance company.

    If you want to keep the vehicle, the finance company (lessor) usually offer a peppercorn rental service; this is a nominal annual charge that is also treated as a tax deductible rental. 

    If your lease is subject to a residual where the vehicles value proves to be less than the final balloon payment, you as the customer (lessee) would be responsible for the short fall to the finance company (lessor).

    Contract Hire or Leasing - which is the correct terminology?

    Contract Hire may be referred to as Leasing, whilst this is a popular reference, a vehicle leasing agreement is not the same as Contract Hire, there are key differences.

    Vehicle Lease agreements in the U.K. are usually subject to a residual value, where the lessee - the person who leases the vehicle - is responsible to the Lessor - the owner (Finance Company) - for the residual value amount.

    Alternatively, there may be what is termed as fully amortized, which is where the asset value is written down to a nominal figure over the lease period.

    To make life as simple as possible, the All Vehicle Contracts website helps you choose and compare which vehicle and vehicle lease deal is right for you. Interactive quotation options and full vehicle comparisons, including whole life costs on virtually any make, model or manufacturer, are available for you to explore and compare on line.

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