How to work out asset finance repayments, with examples

An asset finance calculator, whether it is on a lender’s site or in a spreadsheet, needs six inputs. If you have them, you can check any quote:

• Price. The cost of the asset, and whether it includes VAT.
• Deposit. Cash, a part-exchange or a grant, all of which reduce the amount financed.
• Balloon. An optional larger final payment that lowers the monthly payments.
• Term. The number of monthly payments. Lombard, for example, offers hire purchase terms of 12 to 84 months.
• Rate. The interest rate, and whether it is a reducing-balance rate, a flat rate or an APR.
• Fees. Documentation, arrangement and option-to-purchase fees.

Our guide to asset finance explains the products themselves. This page is about the arithmetic.

Hire purchase spreads the cost of buying an asset, and you own it once every payment, including any option-to-purchase fee, has been made. Our guide to hire purchase covers how it works. To work out the payment:

1. Start with the price of the asset, excluding VAT if you are VAT-registered and will pay the VAT separately.
2. Subtract the deposit, any part-exchange and any grant. The result is the amount financed.
3. If there is a balloon, set it aside: it is paid at the end, but interest still runs on it throughout.
4. Convert the annual rate to a monthly rate by dividing by 12.
5. Apply the repayment formula below, or use a spreadsheet’s PMT function.
6. Multiply the monthly payment by the number of months, then add the deposit, any balloon and fees. That is the total amount payable.

Here is a machine costing £40,000 plus VAT, with a £4,000 deposit, financed over four years at an illustrative 8% a year on the reducing balance:

Compare that with a real published example. Lombard’s hire purchase page shows a £26,000 purchase with a £5,200 deposit, £20,800 borrowed over 48 months at a fixed 9.33% interest rate, 9.7% representative APR, monthly repayments of £519.50 and a total amount payable of £30,201.28. Forty-eight payments of £519.50 plus the deposit come to £30,136, so ask any provider to itemise what makes up the difference in its own total.

Some asset finance is quoted as a flat rate, charged on the full amount financed for the whole term even though you are paying it down. On the same £36,000 over four years, a flat rate of 8% means £11,520 of interest (£36,000 × 8% × 4) and a monthly payment of £990, against £878.87 on a reducing balance.

If a quote gives a flat rate, ask for the APR as well, which includes compulsory fees and reflects the falling balance. Our guide to APR explains the difference.

VAT is where hire purchase and leasing differ most in cash terms.

• Hire purchase. HMRC guidance says that where goods are supplied with separate finance, VAT is due on the whole of the charge for the goods at the outset of the contract. In practice you pay the VAT at the start, and a VAT-registered business may be able to reclaim it, subject to the usual rules, which your accountant can confirm. On the £40,000 machine above, that is £8,000 of VAT due at the start.
• Leasing. HMRC’s guidance on leasing describes the whole of each instalment as subject to VAT where the supply is one of leasing services. So VAT is added to each rental instead of paid up front.

Our comparison of hire purchase and leasing covers the other differences, including ownership and tax relief.

On hire purchase, the cash you need at the start is the deposit plus the VAT, plus any fees, not just the deposit. Take a van priced at £30,000 plus £6,000 VAT, with a £3,000 deposit, financed over five years at an illustrative 8% a year:

A lease is priced differently. The finance company owns the asset and expects it to have a value at the end, so you pay mainly for the part of its value you use up, plus interest on the whole amount. The same formula applies, with the expected end value (the residual) in place of a balloon:

1. Start with the price of the asset, excluding VAT.
2. Subtract any advance rental, which is often several monthly rentals paid up front.
3. Set aside the residual value the finance company expects at the end.
4. Apply the formula to get the monthly rental before VAT.
5. Add VAT to each rental.

With contract hire the finance company sets the residual, and you hand the asset back. Mileage limits and excess mileage charges then matter as much as the rental. Our guides to finance leases and operating leases and contract hire explain the structures.

Tax relief changes the real cost. GOV.UK says the annual investment allowance is £1 million, and that for items bought on hire purchase you can claim for all payments due under the contract once you start using the item, but not for the interest. Business cars are excluded from the allowance. Capzy does not give tax advice, so confirm the treatment with your accountant.

Then check:

• The total amount payable, including deposit, balloon and every fee.
• Whether the rate is fixed or variable. Lombard, for example, says fixed-rate agreements may carry early settlement charges and variable-rate agreements carry none.
• The option-to-purchase fee on hire purchase.
• Whether the agreement is regulated. Lombard says a sole trader or partnership of two or three partners borrowing up to £25,000 will have a regulated conditional sale agreement rather than hire purchase.

Capzy is a credit broker, not a lender, and the lender pays us when a facility completes. You can check your funding options with a soft search that does not affect your credit score. A lender’s full application may use a hard search, and all finance is subject to status and lender criteria. More guides are in our types of finance section.