There are many options available to you especially if you are a business owner this can also be applied to van finance, truck finance or any other type of vehicle.
1. Hire Purchase
Perhaps the most common and traditional method, essentially you are paying the vat upfront and then spreading the cost of the vehicle over a period of time.
Its is also common for a customer and occasionally banks to request a 10% deposit although this is not essential. The banks will usually place a restriction on how old the vehicle is at the end of the term.
You can choose to have a balloon payment at the end and this is usually allowed on terms of up to 48 months.
Interest is accrued on the balloon payment but you do not pay the capital amount.
This means the monthly payment is a lot lower than finance agreements without them but more interest is payable overall.
Interest rates will vary depending on the credit status and sometimes its age some lenders will restrict the age of vehicles they will finance.
Truck finance will normally achieve longer terms due to the residual values being greater than other vehicles.
The asset like any other on hire purchase is depreciated inline with HMRC guidance as it sits on your balance sheet. We also recommend checking with HMRC over reclaiming the vat as it is not usually possible on anything other than a commercial vehicle.
2. Finance Lease
More uncommon now since the inception of contract hire but still possible.
Vat is spread over the term and charged on each monthly payment.
Title to the asset does not occur until the end of the term and is usually given following rebate of sales proceeds. Please ask us for more information on this or consult with your accountant.
The goods will usually appear as a balance sheet item with a traditional finance lease and only the interest element of the payment is offset against tax.
Writing down allowances do not apply.
3. Operating Lease
Almost extinct in 2020 again since the invention of contract hire, it was essentially a finance lease with a balloon payment.
Goods under operating lease contracts were seen to be off balance sheet however various accounting laws have altered this. We recommend it is worth checking with your auditor or an accountant.
Operating lease use to be more common in the truck finance sector or with plant and machinery.
4. Contract Hire
One of the most popular methods or car finance in 2020. Vehicles are kept off balance sheet as the monthly payment is just allocated to that asset.
The underlying cost of the asset is not relevant as the vehicle is not owned at any point by the customer.
As such the payments can be written off against tax and the vehicle does not appear on the business balance sheet.
Its is a great way of financing brand new vehicles that suffer from severe deprecation in the first 2 years.
At the end of the term the vehicle is handed back to the lease company.
Vat is applied to the monthly payments and is not required at the start of the agreement.
Most leases require an upfront payment and come with a mileage restriction.
If you break the mileage restriction you are charged an additional amount per mile over the limit, it is worth checking what this figure before you sign !
Vehicles that are returned with damage will also be charged for, the lease company will have a list of standard charges that you will incur.
We recommend that customers check the charges before handing the vehicle back or a trip to the local body repair shop might be in order !
We hope these basic guidelines give some food for thought about what maybe the best option for you or your business.
It is not a one size fits all solution and usually depends on what type of vehicle you want to purchase, how long you will keep it, and how much you want to spend.
Prestige vehicles and classic cars will require more attention to how they are financed as it is likely these types of vehicles will be an investment over the long term.
Please complete one of our forms if you would like a no obligation quote.