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Contract Hire and Leasing Guide

How Finance lease works

Vehicle finance leasing presents an intriguing and efficient avenue for businesses in the U.K. to acquire new vehicles without the hefty price tag of outright ownership. This financial solution has its roots in the 1800s and has evolved to become a cornerstone of equipment finance globally, catering not just to smaller assets but to substantial investments like vehicles, aircraft, and even power plants.

For companies that are VAT registered, whether small, large, or partnerships, vehicle leasing in the U.K. offers a cost-effective strategy to update or expand their fleet, especially for assets like vans and commercial vehicles that tend to depreciate rapidly.

One of the key advantages of finance leasing is its affordability and flexibility. It allows businesses to acquire new vehicles with a low initial outlay and fixed monthly repayments, making budgeting simpler and more predictable.

The lease terms are customizable, typically ranging from 24 to 60 months, to match the lessee's budget and annual mileage requirements. Moreover, VAT registered businesses benefit significantly, as 50% of the VAT on monthly rentals is reclaimable, and this figure jumps to 100% for commercial vehicles. Finance lease agreements also enable businesses to profit from the sale of the vehicle at the end of the lease term, offering a return on the asset's residual value minus a percentage to the finance company.

Understanding the jargon and terms of a finance lease is crucial. The agreement often involves a residual value or balloon payment at the end, which reduces the monthly payment but requires the lessee to ensure the vehicle's sale covers this final sum. Notably, finance leases do not impose mileage restrictions, setting them apart from other types of vehicle finance options.

At the lease's conclusion, the lessee can either arrange for the vehicle's sale, benefiting from any profit as a refund of rentals, or opt for a peppercorn rental to keep the vehicle for a nominal annual charge. Making the right choice between contract hire and leasing depends on the specific needs and circumstances of the business, with each offering distinct benefits and considerations.

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