What Is A Personal Finance Lease?

Finance Leasing is a way of acquiring the use of a vehicle without taking ownership of it.

The leasing period is usually a number of months or years during which the vehicle is still owned by the leasing company. Effectively the lessee (the person or company to whom the vehicle is leased) is borrowing the vehicle from the supplier for a fixed period in return for a monthly lease rental payment.

What's In Finance Lease Rentals?

During the lease period the lessee pays a rental to the leasing company which covers the costs incurred by the leasing company to acquire the vehicle. In other words, the lessee pays for:

The purchase price of the vehicle
VED
Interest Charges
Profit Margin
VAT
Maintenance (Optional)

At the end of the lease period the lessee normally returns the vehicle to the leasing company (though some leases may have a "run-on" clause allowing the vehicle to continue under lease for much lower monthly lease rentals).

The leasing company disposes of the vehicle and pays the lessee a proportion of the residual value obtained on the sale. This repayment is referred to as a rebate of rentals and includes VAT.

Advantages

Because the leasing company recovers VAT on the price of the vehicle when it is purchased, the base monthly rentals for cars will be lower than comparable finance instalments for hire purchase.

However, leasing is a service subject to VAT, so the monthly payments are subject to VAT at the standard rate, which adds back to the monthly payments much of the savings effect on the VAT recovered on the purchase price.

Because the vehicle is leased, the normal responsibilities of ownerhip, such as sourcing the best deal and obtaining the best resale value, are avoided. The lessee may profit from prudent management of the vehicle, such as achieving a better resale price than expected and therefore a higher rebate of rentals.

Disadvantages

The lessee is normally at risk for the residual value of the vehicle at the end of the lease.

This means that, if the vehicle is returned at the end of the lease in a condition below the standards in the British Vehicle Rental & Leasing Association's ‘fair wear and tear’ guidelines then the lessee will usually be charged for the costs of rectifying excessive bodywork or interior damage or for mechanical damage not covered by the manufacturer's warranty.

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