Funding Methods - Finance Lease

How it Works:

The crucial difference from Contract Hire is that Finance Lease rentals are not necessarily dependent on a predetermined vehicle life cycle - and hence residual value. The lessee may pay back the entire capital cost of the vehicle plus charges over a period of time, or may agree a balloon payment to reduce the monthly rental - but never takes ownership. This method is particularly useful for fleets with wide variations in operating requirements. Despite the fact the operator does not assume ownership, he does take residual value risk.

Advantages:

Ø Small upfront deposit and the option of a balloon payment.
Ø Rentals can be offset against tax.
Ø User can decide when to cancel contract but will incur some early termination charges.

Disadvantages:

Ø Vehicles are on Balance Sheet.
Ø Risk of vehicle resale value lies with user.
Ø No capital allowances for user.

Summary:

Following the VAT changes in August 1995, leasing companies are able to reclaim input VAT which reduces their capital cost and hence the amount of funding and repayments required. This makes Finance Lease a cost effective alternative to Contract Hire for certain companies.