Lease Finance Buying Guide
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.
