The Principal of Lease Purchase
Lease Purchase is essentially the same as HP – the principle difference is in the terminology and the structure of payments, which is based on rentals. The term Lease Purchase comes from a HP agreement with a leasing payment structure.
In addition, some finance companies differentiate Lease Purchase from Hire Purchase by using it where the customer wishes to defer payment of a substantial part of the asset cost. Until the end of the agreement, perhaps because he intends to sell the asset at that point and use the proceeds to pay the final rental.
All of the previous information on HP applies.
> Improved cash-flow
It allows you to spread the cost of an asset over a pre-determined period of time
The Vat is paid and recouped in exactly the same way as if you had bought the asset for cash.
> Writing down allowances
When you buy an asset via hire purchase you can claim “writing down” allowances in exactly the as way as if you had paid cash for the asset,
A hire purchase agreement is independent if any other financial arrangements you or your business may have, such as a bank overdraft. Thereby preserving existing credit lines open to the business.
The primary period rentals do not fully cover the cost of the customer’s asset. The present value of the rentals must be less than 90% of the original cost of the asset.
The risks and obligations of future value of the asset are shared between a given third party and the leasing company.
For example, a £500,000 deal over a 7 year period may involve the purchase of the assets at the end of the period by a third party for say, £200,000. Therefore the rentals need only be based on £300,000.
The most common form of Operating Lease is known as contract hire. Essentially this gains the customer the use of the asset together with added services. A typical example of an asset on contract hire would be a fleet of vehicles. Operating leases do not usually provide for secondary periods.
What is the Residual Value?
Residual value is the value of the asset at the end of the lease term. Residual values play an especially important role in an Operating Lease, which is used in conjunction with equipment that retains value at the end of the primary period. The residual value will be left out of the rental calculation (apart from hiring charges). Either the leasing company or a third party will take the risk that the asset will not be worth the amount of the residual value at the end of the lease.
What is balloon rental?
Payments are made over the period of the lease. Sometimes a larger payment or lump sum called a ‘Balloon’ is paid at the end of the lease period. Normally the customer would pay a balloon rental on the final day of their primary period. A balloon payment is always made by the customer
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