APR (Annual Percentage Rate)
The standardised annual cost of a credit agreement, expressed as a percentage and calculated on the reducing balance. APR includes interest and mandatory fees. By law, lenders must quote APR, making it the best tool for comparing finance deals from different providers.
Balloon payment
A larger-than-normal final payment at the end of a finance term. Used in some HP agreements and Finance Lease structures to reduce monthly payments during the term. If you cannot pay the balloon at the end, you typically need to refinance or sell the asset.
Capital allowances (AIA)
Tax relief that allows businesses to deduct the cost of capital assets from their taxable profits. The Annual Investment Allowance (AIA) allows a 100% deduction up to £1 million in the year of purchase. This applies when buying on HP. Consult your accountant for your specific situation.
Contract hire
A fixed-term rental agreement for a commercial van. You agree a mileage limit and a monthly rental, then hand the van back at the end of the term. You never own the van. Monthly payments are typically the lowest of all van finance options.
Depreciation
The reduction in value of a van over time. Depreciation is fastest in the first 2–3 years of a new van's life. In Finance Lease, your monthly payments cover the depreciation of the van over the term - which is why payments are lower than HP.
Finance lease
A rental agreement where the lender owns the van. Monthly payments are lower than HP, VAT is spread over the term (beneficial for VAT-registered businesses), and at the end you can sell, hand back, or refinance - but you do not own the van. Good for VAT-registered businesses wanting lower monthly costs.
Flat rate
An interest rate calculated on the original loan amount, not the reducing balance. A 5% flat rate is approximately equivalent to 9–10% APR. Used widely in commercial asset finance. Always convert to APR or use total amount payable when comparing deals.
GVW (Gross Vehicle Weight)
The maximum total weight of a loaded van - including the vehicle itself, driver, passengers, and cargo. GVW determines commercial vehicle classification: vans up to 3,500kg GVW are "light commercial vehicles" and attract different tax and regulatory treatment from heavier vehicles.
Hire purchase (HP)
A finance arrangement where you pay a deposit and fixed monthly payments, then own the van outright at the end of the term. The van appears as an asset on your balance sheet and you can claim capital allowances from day one. No mileage restrictions.
LTV (Loan to Value)
The ratio of the loan amount to the value of the van. A £18,000 loan on a £20,000 van is 90% LTV. Lower LTV (larger deposit) reduces the lender's risk and typically improves the rate offered or the chance of approval.
Option to purchase
A small fee paid at the end of a hire purchase agreement to formally transfer ownership of the van from the finance company to you. Typically £1 or a nominal amount. After paying the option to purchase fee, you own the van outright.
Payload
The weight capacity of a van - how much cargo it can carry. Payload is calculated as GVW minus the unladen vehicle weight. For many businesses, payload is as important as panel van or body size in selecting the right vehicle. Finance eligibility and terms are not typically affected by payload.
Personal guarantee
A commitment by an individual (typically a director or business owner) to personally repay a business loan if the company fails to do so. Standard in van finance for new businesses and many SME applications. If the business fails, the individual is personally liable.
Residual value
The estimated market value of a van at the end of a Finance Lease or Contract Hire term. The lender sets this at the outset. If the actual value at the end of the term is lower than the assumed residual, the lender may not recover their expected return from selling the van.
Sale and leaseback
A transaction where a business sells a van it already owns to a finance company, then immediately leases it back. This converts a physical asset into working capital while retaining use of the vehicle. Useful for businesses that need liquidity without selling a business-critical asset.
VAT reclaim on van finance
VAT-registered businesses can reclaim 100% of VAT on a van used exclusively for business purposes. Under HP, VAT on the full purchase price is paid and reclaimed via the VAT return. Under Finance Lease, VAT is charged on each monthly payment and reclaimed monthly. Under Contract Hire, VAT is charged on the monthly rental (50% reclaimable if there is any private use; 100% if business only). Confirm your specific position with your accountant.