A guide to finance leasing

Wednesday, February 5, 2014 - 16:28
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EXPERT: Motor Mistress gives her view

In our latest Expert Blog, Debbie Mountford, Director at Motor Mistress, explains several key concepts…

It’s one of those words that has become so over-used in recent times: leasing.

When people talk about whether they are looking to lease a car, they are – more often-than-not – talking about taking on a contract hire agreement.

The term leasing has become so widely used that it now seems to be pretty much representative of all types of vehicle hire agreements, where the customer pays a monthly rental and does not take ownership.

Lease, contract hire, long term vehicle rental agreements; they can all be put into the same bag.

But finance lease – or, as some dealers call it, operating lease – can’t.

Contract hire vs. Finance lease

Finance lease is different to contract hire and any other agreement where the vehicle simply goes back at the end.

As these type of agreements are often referred to as leasing, it can be very confusing as to what is different about a finance lease.

In short, finance lease offers the customer the main benefits of contract hire but with the added plus of being able to potentially benefit from the sale proceeds.

Let’s take a look at how finance lease works…

What is finance lease?

Finance lease is perfect for any business that would like to run a fleet of cars without the capital outlay and complications that can arise as a result of purchasing them outright or funding them via hire purchase (HP) or lease purchase (HP with a balloon).

Finance lease offers low monthly payments – similar to contract hire – and the benefit of fixed payments that are also subject to VAT (allowing 50% VAT reclamation on the rental at the current legislation).

In addition, the rentals are allowable against tax and there is none of the company’s capital tied up in what is a depreciating asset.

At the end of the finance lease period, the customer sells the vehicle to a third party and retains up to 98% of the sale proceeds.

In anyone’s book, the opportunity to gain money at the end of the contract is a real boon when you compare it to the contract hire alternative (where the vehicles just get handed back at the end).

Any monies leftover from sale proceeds can go towards a deposit on your next vehicle and sometimes, there is even a little more left in the pot.

Summary

As long as your finance Lease agreement is set up by an expert, it is a great way to get the best of both worlds.

If your residual value is set at a realistic figure then usually, the chances of equity are good.

Of course, like anything, this does all depend on your mileage (whether you adhere to the mileage estimate that you quoted when agreeing the deal) and the condition of the car – but doesn’t everything?

Image courtesy of Images_of_Money, with thanks.

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