Van leasing and van finance

The first type of van finance is usually known as contract hire. It is essentially equipment leasing, and may also be called an operating lease.

The key thing you need to know about contract hire is that this kind of deal is a rental. You won’t own the van when the contract is up, and you’re essentially hiring the van for the duration of the contract.

It’s called contract hire because you are signing a contract to hire a van for a set amount of time (usually between 12 and 60 months).

The second type is van finance, also known as lease purchase, or hire purchase. With this type of van funding, you’re buying a van in instalments. This way of purchasing a van is commonly offered at dealerships themselves, and most of the major manufacturers offer their own in-house finance.

The key thing you need to know about van finance and hire purchase is that this kind of deal is for the long-term. You will own the van at the end of the contract, and once the payments have finished it’s yours forever.

It’s called van finance because you’re buying the van on finance, paying in instalments to eventually own it outright.

The third type is finance leasing. A finance lease blends together contract hire (equipment leasing) and hire purchase. That might sound confusing, but it’s effectively a lease with the option to buy at the end of the contract.

When your initial finance lease period is over, you can either give the van back, or pay a ‘balloon payment’ to purchase it. This payment is worked out based on the value of the van after 36 months of use, minus the money you’ve already paid in your monthly instalments. You can often finance the balloon payment too.

A finance lease is just that, a blend of leasing a van and buying it on finance.

One of the major advantages of leasing is that you can upgrade the van every few years. For many businesses, this makes leasing the most attractive option because you’ll always be using a van that’s fairly new and up-to-date in terms of features.

You might also work in an industry where your public brand is important — in which case, it’s an advantage to have a new van that looks professional, instead of an aging workhorse showing signs of abuse. Alternatively, perhaps your van will be worked particularly hard, and will need upgrading regularly. In many of these cases, van leasing could be the right choice.

Perhaps the most obvious advantage of van leasing is the flexibility — if you come to the end of the agreement and don’t need a van any more, you can just give it back! Other firms will find leasing is much more straightforward than buying and selling vans every few years.

But van leasing can be inflexible in other ways. Lease agreements almost always have mileage limits, and you’ll need to take care of the van because the lender could charge you for damage if it’s not kept in good condition.

Finally, lots of companies have quite specific requirements for vans, for example internal shelving, bulkheads, or full skins. If your needs are quite specific it might be more cost effective to buy instead of lease, to pay for these things only once.

The flexibility of leasing comes at a cost, and for some firms it will make more financial sense to buy a van outright, but spread the cost using van finance.

Hire purchase may be the best decision if your company will always need a van, and also if your usage isn’t as heavy. After all, there’s no point in paying to upgrade something that doesn’t need to be upgraded, and you might find you can quite comfortably use a van for longer than the term of a lease agreement.

Remember that whatever type of van you buy or lease, it will depreciate in value. So whether you’re leasing a van or buying one on finance, it’s a cost, not an investment. Thinking of it this way might make it easier to choose between the various types of van finance available.

Each type of van finance will have slightly different tax implications. Usually, if you lease a van it will be accounted as an operating cost, and won’t appear on your balance sheet.

On the other hand, if you buy a van using hire purchase or dealer finance, it will appear on your balance sheet at the beginning of the agreement. This means that leasing and hire purchase have different effects on your profit calculations, and your accountant might recommend one over the other for tax reasons.

Some types of van finance will also allow you to claim back VAT, which can add up to significant savings if you need a fleet of vans rather than just one or two.

Maintenance is a key consideration when you’re choosing between van leasing and van finance. With leasing, you’ll often have the option to add a maintenance agreement, so you don’t need to worry about servicing or repairs. Many firms will even include breakdown cover and insurance as a bonus, and in general van leasing is less hassle.

With hire purchase, you’re the legal owner, which means all the burdens of ownership will be yours, and you’ll have to pay for servicing and repairs like you would if you paid cash. But all those extras you get with leasing cost money, and hire purchase often works out cheaper overall, especially if you need a van for the long term.

Speaking of cost, you should also consider the monthly payment amount, deposit required, and the length of the contract. As the cliché goes, cashflow is king, so you should make sure the monthly payment is manageable for your business. Maybe it’s worth paying more overall in return for a smaller monthly payment?

You should also be aware that many types of van finance will require a significant deposit — so although you’re spreading the cost, you’ll still require some kind of lump sum.

Finally, when you’re researching your options for getting a van, don’t get distracted by all the options. Lots of lenders and dealerships will advertise “free insurance for 12 months” or offer you a wealth of add-ons like satnav and bluetooth. But you should think carefully about whether these things are really worth paying extra for, and read the small print.