Types Of Asset Finance
We can generally distinguish three major
types of leasing: finance leasing, operating leasing
and contract hire. Although strictly speaking not a
type of leasing, we also include hire purchase in the
following discussion:
- Finance Leasing (Full Payout Lease).
You effectively acquire all financial benefits and
risks without actually acquiring legal title. The
leasing rate is computed to collect the full value
of the asset (plus finance charges) during the contract
period. At the end of the lease, the asset is sold
to a third party and you can receive a share of the
sale proceeds (if the lease is not being extended).
Generally, you will not be able to become the owner
of the asset at any time - unless a private arrangement
is made with the third party. However, you usually
have the option to extend your lease and as you will
have paid for almost the full value during your initial
lease period, the rental payments for subsequent periods
will be minimal (sometimes referred to as "peppercorn
rental").
- Operating Lease. Often with a shorter
time frame than financial leasing (always significantly
shorter than the working life of the asset), operating
leasing is more like a regular rental. The lessor
expects to be able to either sell the asset in the
second-hand market or to lease it again and will therefore
not need to recover the total asset value through
lease payments. There may be an option to extend the
leasing period at the end (this negotiation can only
take place at the end of the initial rental period).
As with finance leases, you will not be able to become
owner of the asset at any time but, contrary to financial
leases, you will not share in the sale proceeds.
- Contract Hire. A form of operating
lease (often used with cars and other vehicles) that
includes a number of additional services such as maintenance,
management or replacement if asset is in repair.
- Hire Purchase. This is an agreement
for the hiring of an asset with an option to purchase.
The legal title will pass to you when all payments
have been made. The term of a hire purchase must be
significantly shorter than the working life of the
asset. You are able to claim capital allowances as
if you had purchased the asset outright, gaining immediate
use of it. Hire Purchase agreements are typically
written for domestic users, not so much for business
users.
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Asset
Financing Guide
