Finance Lease
What is Finance Lease?
A customer "rents" a vehicle and either sells it on behalf of the leasing company at the end of the agreement or enters into a secondary hire period.
Finance Lease is a traditional lease agreement where the customer "rents" the vehicle for an agreed term.
A Finance Lease is a form of flexible leasing to fund the use, but not the ownership, of a vehicle and is
ideally suited to VAT-registered businesses. The leasing company (lessor) hires the vehicle to the
customer (lessee) for an agreed period of time (the primary period of hire) for an agreed monthly sum.
Finance Lease agreements can be regulated or unregulated under consumer credit legislation. This all
depends on the type of customer and the total amount of the rentals.
Finance Leases versus Contract Hire
A Finance Lease transfers the majority of the “risks and rewards” of ownership to the lessee/customer.
There are two main differences between a Finance Lease and Contract Hire (also known as an Operating Lease) agreement:
Finance Lease
A Finance Lease can be structured with or without a balloon payment. However, a Contract Hire agreement always takes into account a residual value set by the leasing company, but this residual value is not visible to
the customer nor is it their responsibility.
Contract Hire
A Finance Lease often requires, or provides an option for the customer, to sell the car as an agent of the leasing company (lessor) at the end of the agreement. Under a Contract Hire agreement the customer will always hand back the vehicle to the lessor.
What happens at the end of the agreement?
Return vehicle.
Return the vehicle to the Lessor; who will sell it and refund any surplus sale proceeds to the customer as a rebate of rentals (this figure is usually around 95% of the surplus sale proceeds with some of the surplus being retained by the Lessor to cover administration costs). If the value of the vehicle is in negative equity (only likely to happen if there is a balloon) then the Lessee is liable for any shortfall.
Lessee arranges sale as an agent.
The Lessee can act as an agent of the Lessor and arrange for the sale of the vehicle to an `independent third party`. The Lessor receives the full sale proceeds and refunds the Lessee a fixed percentage of any surplus that is generated as a rebate of rentals. This percentage is agreed prior to the agreement commencing.
Continue to use.
The Lessee can continue to use the vehicle for as long as they want on payment of an annual secondary period rental (commonly known as a peppercorn rental). This is normally the equivalent of one monthly rental. This option is not normally available where there is a balloon rental payable.