Finance Lease Explained - Everything you Need to Know

The information provided on this page is for information purposes only and should not be considered financial advice. We recommend you speak to a qualified professional about your specific circumstances.

With an increasing number of finance options available to customers looking for a new vehicle, understanding which one is right for you can be confusing at times. Here at Smiths Motor Group, we have created a series of blogs designed to help you understand which of the many options might work best for you.

In this months’ blog we will focus on a funding option for our business customers known as lease hire or finance lease.

As always, happy reading!

Lease hire is a method of financing a vehicle that is usually accessed by VAT-registered businesses and companies, however sole traders and partnerships can also take advantage of lease hire. It is a form of finance where the vehicle remains the property of the finance company, with the vehicle effectively hired out to a business. The business can then use this asset while paying an effective rental rather than a repayment.

Lease hire differs from contract hire in that there is usually a ‘balloon payment’ at the end of your lease agreement, which pays off the leasing company’s investment. You agree how much your balloon payment will be, depending on whether you want higher or lower monthly payments during the lease agreement.

You will have full use of the vehicle during the lease hire period. At the end of the agreement the vehicle is sold to a third party (this could be us or via a private sale), if the sold price is above the pre-determined balloon payment then the finance company will refund 100% of the excess sales proceeds back to the hirer, if the sale price is below the balloon payment then the hirer will be liable to make a further payment to the finance company. This way, a company with a lease hire agreement shares more of the risk than if the vehicle was on a contract hire agreement, but can also potentially profit if the vehicle exceeds the value of the baloon payment.

Alternatively you can settle the balloon payment yourself and agree to lease the vehicle again for a further period by paying what is referred to as a “peppercorn rental” - this is a nominal amount payed annually.

What are the pros and cons of lease hire?

There are many benefits to acquiring a vehicle using lease hire. These include:

  • Low monthly costs and initial outlay – One of the main reasons why companies take on lease hire agreements is to avoid paying a large initial deposit.
  • Flexibility – The finance companies we use offer a number of payment options to suit your cash flow. You can make deferred payments, lowering the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly instalments.
  • Latest vehicles – You can gain access to vehicles equipped with the latest technology and safety equipment. These could have otherwise been seen as unaffordable.
  • VAT payments – Up to 50% of the VAT payments can be reclaimed for cars & up to 100% for commercial vehicles.
  • Balance sheet – Taking out a finance lease allows you to show the vehicle on your balance sheet, and outstanding rentals are represented as a liability.
  • Sales proceeds – You can boost your equity by receiving a proportion of the sale at the end of the lease hire term.

There are disadvantages to lease hire too. Primarily these are that you will never take ownership of the vehicle as the car or commercial vehicle must be sold to a third party at the end of the agreement. The hirer also takes on the administration and operating risk associated with the vehicle, including the road fund licence.

Who is lease hire right for?

A finance lease removes the pressures of heavy initial financial outlays. It is a proven method of giving your business access to the latest vehicles without actually having to take ownership and buy them outright. There are also tax benefits too, which make this an ideal finance method for many businesses.


We hope that this blog has been insightful and has given you a better understanding of whether lease hire is something to consider for your next vehicle purchase. Keep your eyes peeled for next month’s blog and should you have any questions about anything covered, just get in touch using the links at the top of this page.