Part of: Van Finance
Balloon structures
Van lease purchase, and the balloon at the end
Lease purchase is hire purchase with part of the cost moved to the end. It brings the monthly payment down. The lump sum still has to be paid.
- An enquiry, not an application
- New and used vans
- Ownership and VAT explained
Despite the name, lease purchase is not a lease in the usual sense. It is a form of hire purchase. You pay monthly instalments over the term, then a final lump sum, known as a balloon. Once the balloon and any option fee are paid, ownership passes to you.
Because part of the cost is deferred, the monthly payment is lower than an equivalent hire purchase agreement with no balloon. That is the attraction. The cost is that a significant sum falls due at the end, and interest is generally charged on the deferred amount throughout the term, so the total cost is usually higher.
Lease purchase can be a good fit. It can also cause real problems when the balloon is set without a plan for paying it. This page explains both sides.
Who this suits
Lease purchase tends to suit businesses that want ownership but need the monthly cost kept down, and that have a realistic plan for the final sum.
- Businesses expecting cash flow to improve over the term
- Operators who intend to keep the van and can save towards the balloon
- Businesses buying vans that tend to hold their value
- Owners who understand the balloon is a debt, not an option
What lenders look at
Lenders assess affordability in the usual way, and then look at the size of the balloon against the van's expected value at the end. They are generally cautious about balloons that would exceed what the van is likely to be worth, so the balloon on offer depends on the van, its mileage and the term.
- Affordability of the monthly payments
- The van's expected value at the end of the term
- Expected annual mileage
- Term length and the van's age at the end
- The business's plan for paying the balloon
What you will need
The documents are the same as for hire purchase. What you need in addition is a plan.
- Usual business, identity and bank statement documents
- Details of the van and the expected annual mileage
- A clear view of how the balloon will be paid at the end
- Your accountant's view on the tax and accounting treatment
How it works in practice
At the start, you may pay a deposit. VAT on the purchase price is normally payable upfront, as with hire purchase, and a VAT registered business can usually reclaim it, subject to business use. Monthly payments then run for the agreed term. The balloon falls due with or after the final payment.
At the end, the usual routes are paying the balloon in cash, refinancing it with a new agreement, or selling the van and using the proceeds to settle it. None of these is guaranteed. A refinance depends on lender approval at the time. A sale depends on the van's value at the time, and if the van sells for less than the balloon you pay the difference.
The general tax treatment is usually the same as hire purchase. The balloon does not change it, but your accountant should confirm.
Lease purchase compared with a finance lease
Both can lower monthly payments by leaving a sum to the end. With lease purchase, paying the balloon makes you the owner. With a finance lease, a final residual rental does not normally transfer ownership. If ownership matters, lease purchase is the closer match.
Before signing, identify which part of the business will fund the final payment and when those funds become available. A hoped-for vehicle sale is not the same as a reserve held for the balloon. Review that plan each year, especially if mileage increases or the van needs expensive repairs.
Common mistakes
These are the lease purchase problems we see most often.
- Treating the balloon as optional. It is owed.
- Assuming the balloon can always be refinanced.
- Assuming the van will sell for more than the balloon.
- Setting a large balloon on a high mileage van.
- Comparing only monthly payments, not the total amount payable.
Sole traders and partnerships
If you are a sole trader, a partnership of two or three partners, or an unincorporated body, some finance agreements may be regulated under the Consumer Credit Act 1974. A regulated agreement carries extra protections and different paperwork. Whether yours is regulated depends on the amount borrowed, the purpose and any exemptions that apply. We will tell you before you proceed, and the lender will confirm it in the agreement.
Questions we are asked
Is lease purchase the same as leasing?
No. Lease purchase is a form of hire purchase. Ownership passes once the balloon and any option fee are paid.
What happens if I cannot pay the balloon?
Talk to the lender early. Options may include refinancing or selling the van, but neither is guaranteed, and any shortfall remains owed.
Does a balloon cost more overall?
Usually, because interest is generally charged on the deferred amount for the whole term. Compare the total amount payable.
Can I choose the size of the balloon?
Within limits. Lenders set the maximum based on the van's expected value at the end of the term.
Can I reclaim VAT on lease purchase?
VAT is normally paid upfront on the purchase price, as with hire purchase, and a VAT registered business can usually reclaim it, subject to business use.
Related van finance guides
Compare finance structures
Choose your van
VAT and releasing capital
This page is general information, not tax, accounting or legal advice. Tax and VAT treatment depends on your circumstances and can change. Speak to your accountant before choosing a structure. Finance is subject to status and lender approval.
Who you are dealing with
A broker, regulated, and clear about it
Sorbus Finance Limited is an appointed representative of Moorgate Finance Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 662419). We are a credit broker, not a lender.
We work with a panel of lenders that includes high street banks, specialist asset finance lenders and manufacturer linked finance houses. Each has its own criteria, so part of our work is matching your business to the lenders likely to say yes, rather than applying everywhere.
Not all commercial finance activities or agreements are regulated by the Financial Conduct Authority. Regulatory protections depend on the activity, agreement and customer circumstances.