Finance Lease is a method of financing a vehicle that is usually favoured for commercial vehicles and by VAT registered businesses. The business obtains the use of the vehicle by paying a rental each month. The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the Finance Lease and the optional residual value (normally called the final balloon payment), plus interest.
Although you never take ownership, at the end of the Finance Lease agreement a rental equivalent to the balloon payment (optional) is payable. Usually this means that the vehicle is sold to a 3rd party company and a proportion of the sale proceeds are returned to the lessee after the balloon has been paid.
Most Finance Lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental by adding an optional final balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the Finance Lease with a secondary period rental (sometimes called a peppercorn rental).
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