Finance Lease for a new van - Everything you need to know - Select Van Leasing
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Finance Lease for a new van - Everything you need to know

Finance Lease could be the perfect way to drive a new van - but businesses need to be mindful of misconceptions or they risk falling foul of the taxman.

That’s according to Sam Bryan (above), Release & LCV Manager at leading UK lease firm Select Van Leasing.

He’s attempting to counter some of the myths about Finance Lease - an alternative finance product to traditional Contract Hire.

And he hopes his advice might even prevent some van drivers from a tax investigation.

He says: “Finance Lease is an amazing product, particularly when it comes to vans.

“It allows for van modification and custom builds. It offers peace of mind when it comes to vehicle damage. And because you need to sell the van at the end of the contract, you could even find yourself in positive equity - which means more cash to put towards your next vehicle.

“Yet it’s also easy to misunderstand Finance Lease - and doing so could see you being targeted by the taxman, which is clearly a scenario to be avoided at all costs.”

Finance Lease - quick facts

  • Only available for business and sole traders
  • 24 – 60 month contracts
  • Large balloon payment at the end of contract
  • Cannot own vehicle, must sell it to a ‘disinterested 3rd party’ at fair market rates
  • You have the risks and reward of ‘ownership’ - could experience positive or negative equity
  • Don’t need to rectify damage to van at end of contract
  • Greater scope for van modification and custom builds
  • Can opt to terminate at any point
  • Road tax not typically included
  • Set Mileage, set Initial Payment, can choose a maintenance package

Finance Lease in a nutshell

First and foremost, this is a lease contract not a method of ultimate ownership. It means businesses can claim back the VAT and off-set the costs during the length of the contract. But you need to be wary of taking poor advice when it comes to selling the vehicle at the end of the agreement.

Why Finance Lease is great for vans

With traditional Contract Hire, customers need to abide by ‘Fair Wear and Tear’ rules, as set out by the British Vehicle Rental and Leasing Association (BVRLA). If you hand the van back at the end of your Contract Hire agreement and it’s damaged, you’ll get a repair bill.

With Finance Lease, you don’t have those concerns. Any damage impacts the residual value of the van at the end of a Finance Lease agreement but you decide whether you want to fix it and sell it, or to simply sell it as it is. If you need a dropside or tipper, for example, Finance Lease is ideal because anyone looking to buy a four year old tipper will expect there to be scuffs and scrapes. Overall, Finance Lease works for vehicles that hold their value - and vans do just that.

Finance Lease lets you modify your van

With Contract Hire, whatever changes you make to your van need to be changed back at the end of the agreement. If, for example, you need an intricate racking system in the back of your van, or you need a mobile workshop, with a Finance Lease you can just sell the van with the modifications present. Whatever you invest in the van might also boost its value, too, helping to nudge you into positive equity.

A Finance Lease balloon payment lowers your monthly fees

With Finance Lease, you need to expect a large balloon payment at the end of the contract. The balloon is set by the finance provider and covers the residual value of the vehicle - ie, how much they predict the van is going to be worth at the end of the contract, factoring-in things like its mileage. By having a substantial balloon payment, customers enjoy lower monthly rental fees. And you settle the balloon by selling the van to a disinterested 3rd party at the end of the contract.

Crucially, the finance company doesn’t want a customer to be ‘upside down’ at the end of a contract - ie, having to settle a balloon payment for more than the vehicle is actually worth - so the balloon will be achievable.

Be realistic about your expected mileage

By setting your annual mileage low at, say, 5,000 miles per annum, you’ll keep your monthly rentals low by protecting the vehicle’s anticipated residual value at the end of the contract. But it’s here where people come unstuck. If, in actual fact, you’re doing 20,000 miles a year, that vehicle is going to be worth much less than expected. And when you come to sell it at the end of the contract, you’ll end up having to make up a shortfall to settle the balloon payment. So, while there’s no ‘excess mileage charge’ with a Finance Lease contract you’ll still be hit in the pocket if you exceed mileage expectations. In the past, Finance Lease was known as an ‘unlimited mileage’ contract, but that’s completely disingenuous. Be realistic about your mileage from the off and build it into the balloon. If you end up doing fewer miles than anticipated, happy days, as you’ll have more equity in the vehicle when you come to sell it at the end of the contract.

Onus is on you to find a buyer for van at end of contract

Generally speaking, the onus is on you to find a buyer for the vehicle at the end of the contract so that you can clear the balloon payment. Some finance providers will send the vehicle to auction on your behalf - but you’re always likely to earn less for it via that method compared with selling it privately. If you sell the van and it’s worth more than the balloon payment, those funds go straight into your pocket. If not, you need to make up the shortfall.

You also need to sell to a ‘disinterested third party’ at fair market rates

This point leads to one of the BIGGEST misperceptions about Finance Lease. You can’t just pay off the balloon payment and own the vehicle. And that includes selling the vehicle to a mate at the end of the contract and it ultimately falling back into your possession.

Let’s say, for example, that you’re a business owner. You get yourself a nice pick-up on a Finance Lease. Throughout the contract, you claim back the VAT on all of the rentals you’ve paid, and you’ve also off-set the cost of those rentals against your pre-tax business profits. You can’t, as the owner of that business, then sell the pick-up to your wife, or brother, or Steve who works in the warehouse before ultimately taking ownership of it.

You’ve already benefited from the VAT and tax savings throughout the life of that Finance Lease contract, you can’t then benefit again by keeping hold of it. You also have to sell it at a fair market rate.

Don’t risk the ‘grey area’

Some so-called experts might tell you that you can sell the van to your mate down the pub. You can even sell the van back to the broker who arranged the vehicle for you, and they can sell it back to you. We still see examples of that happening now. But from where we’re sitting, that’s really problematic - a huge risk. If the taxman catches up with you and realises what you’ve done, they’re going to have a problem with it.

You’ll need to sell the van promptly

Almost all funders simply take the balloon payment out of your bank account via direct debit at the end of your contract. So, it’s in your best interests to sell the van promptly to ensure you’ve got the funds to settle the balloon.

But you can can extend the contract

It’s called a ‘secondary lease’ or a ‘peppercorn rental’, and it allows you to keep using the vehicle (not own it) beyond the end of the Finance Lease contract date. In the vast majority of cases, you still need to pay off the balloon before you can enter into a peppercorn rental. It allows for people who don’t need to sell the van immediately and who still need to use it. The cost of peppercorn rentals varies, from the affordable to the prohibitive, so you’ll need to explore options with different funders. With funder Lex, for example, you can enter into a peppercorn agreement where you don’t need to pay the balloon and you instead keep paying the monthly rental, which then comes off the balloon, as you keep chipping away at it.

Early termination and settlement figures

At any point in a Finance Lease agreement you can terminate the contract by asking for a ‘settlement figure’, which you pay by selling the van. There’s a reasonable chance, however, that if you try to come out early you’re likely to be upside down - ie, with a settlement figure that’s more than the vehicle’s worth. In some cases that might still work for you - you might only be a £1,000 down, whereas in a traditional Contract Hire the early termination charges could be much higher.

Contract Hire vs Finance Lease

Contract Hire: 

  • Dead simple
  • Set your contract length (2-5yrs), set your mileage
  • Initial payment followed by fixed monthly rentals for the term
  • At the end of contract, simply return the vehicle and start again
  • Often cheaper and road tax included throughout contract

Finance Lease

  • More Flexible
  • Most people set for 5 years but you can early terminate at anytime
  • Set indicative mileage
  • Initial payment and monthly fee (just like Contract Hire) but also a final balloon payment at end of contract
  • At the end you sell van and clear the balloon payment (the finance provider gets a small ‘proceeds of sale’ fee)
  • Any equity is yours (subject to a fee) - but any shortfall is also down to you
  • Balloons are always set to be realistic and achievable (based on residual value of the van) – so long as mileage is correct and there’s no heavy damage
  • No excess Mileage charges


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Excellent service received from Cameron, who was knowledgeable and helpful to get me the right deal. Good communication throughout the order process and prompt to respond to queries. Changes to specification and delivery were made without issue. No complaints.
Justin

Thursday, 06/02/2025