If we need a car or some service — we buy it. If we don’t have enough resources to pay for everything at once — we take a loan.
But what if you need a service or, say, transport, but don’t have enough funds? Leasing can help you to solve this problem! This is one of the most popular financial instruments, with many advantages. Actually, this is what we will talk about: what is leasing and what pros it has.
Parsing the terminology, we can characterize this service as follows:
Leasing is a financial service where an enterprise can rent a certain fund (real estate, transport, etc.), thereby gradually redeeming it, as when buying on credit.
Imagine a situation where an entrepreneur needs equipment or transport for a while. He can rent or buy them on credit. But getting a loan or a long-term lease can be difficult.
In the first case, it brings some problems as difficulties issuing a loan or high-interest rates for it. In the second case, you simply pay money for rent, without purchasing this. Leasing can just become the golden mean in both situations.
In fact, it is a loan and a renting in one. You can lease some products for a long-term lease for several years (cars, aircraft, ships, or agricultural machinery). Then you need to decide what to do with this product: buy or refuse and return it to the lessor.
Leasing provides for an agreement in which there are several parties:
The choice is the most important and special leasing feature. Thus, in the case of renting, you are obliged to return the goods to the owner; a loan suggests guaranteed buying of the goods. As for leasing, you rent and use the product, and then decide to return it or buy it. In the end, all parties win.
For example, how it looks from the side of the lessee (client):
The client chooses the object of leasing and the seller. The leasing company purchases and transfers the goods for temporary use to the client for specified terms. When this term ends and the amount is paid within, the client becomes the owner of this property.
An equally favorable picture from the lessor’s side:
Type of investment for the acquisition of property and its transfer on the basis of a leasing agreement to individuals and legal entities. This is carried out for a certain fee for a certain period and on certain conditions stipulated by the contract, with the right to buy out the property.
So, the definition of what is leasing is clear. By the way, leasing has its advantages and disadvantages:
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Pros |
Cons |
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Contract duration: up to 10 years; |
The client is not the property owner and does not have the right to dispose of it at his discretion; |
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Lower interest rate than in loans; |
Payments are subject to VAT; |
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You can buy used property; |
The lessor is the property owner until the end of the lease term with all the following consequences. |
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Flexible payment schedule; |
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It is possible to extend or write off the value of the property, taking into account its physical wear and tear; |
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The right to refund VAT payments for legal entities; |
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Faster application review period; |
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A more loyal attitude towards the client is much softer than at the bank; |
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Leasing is most beneficial for legal entities. And that's why:
Individuals also have can arrange to lease — for example, if they need a car for personal purposes. But you need to carefully compare the offers by leasing companies with the conditions for car loans in banks. Because it often happens that a loan turns out to be more profitable because VAT (20%) is charged on lease payments.
Leasing is reluctantly approved for firms that have been in existence for less than a year. After all, there are very big risks that the business will stop and the entrepreneur won’t be able to pay more. On the other hand, a leasing company is much more willing to complete a deal than a bank. In the end, in case of a violation of payment by the client, the leasing company can simply take the property back.
Car leasing is a popular financial instrument in the automotive market. In two words it is the rental of a vehicle with a subsequent right to purchase a car.
Individuals take a car on the lease when they cannot take it on credit (this is not profitable, or it’s simply impossible in their case.) Then they turn to a leasing company, the latter buys a car that the client likes. After that, the sides conclude an agreement, and this car is leased to a private person.
Most often, companies lease cars in order to use them for their own purposes. It can be transport, taxi companies, courier services, and so on. Cars are also used to transport employees and management.
The client who took the car on lease undertakes to pay every month. If he doesn’t do it, then there is a delay and the lessor can return (withdraw) his car and sell it to someone else.
If you signed the contract, it has expired and you have paid everything, you can either return this car back to the lessor or buy it back at the residual value.
Most often, this is a leasing company and a bank, then all ownership rights to the car belong to the company. It can also be a private person when he bought a car from a private company and, for example, sells it to another such private person.
But this is only the case when the leasing agreement has already been closed. If the "owner" is still the lessee, then it's a scam.
It should be noted that, like any financial instrument, leasing can have its own risks. For example:
Therefore, if you buy a car from a private person, require a certificate of closing the lease and an agreement confirming the absence of restrictions on registration. Make sure that the contract of sale states that the car is not subject to collateral, or credit and has no restrictions.
It’s important to remember that leased cars are most often used for commercial purposes. This means that they have high mileage, they were used for wear and tear, and most likely they are written off after the warranty period. Therefore, it’s very important to carefully inspect the car with a specialist.
What is financial leasing? In general, financial leasing is something similar to a loan agreement. Moreover, a financial leasing agreement combines the features of three documents at once:
Consider the main differences and similarities between a loan agreement and a leasing agreement.
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General |
Differences (financial leasing) |
Distinctions (credit) |
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The agreement provides for the payment of interest (%) and the body of the loan (property value). |
First, the lessor buys the leased asset and then leases it to the lessee. |
The client buys the desired product on his own (through third parties). An exception is if a loan is issued for collateral. |
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If the client does not pay the payments, the subject of collateral (leasing) is returned to the bank. |
No deposit is needed. |
Often additional collateral is needed. |
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May be issued by a bank. |
Accelerated decision-making process. |
Bureaucratic and lengthy decision-making process. |
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Insured events are regulated by the leasing company. |
The bank (or the credit community) does not regulate insured events. |
Anyone who has the status of a legal entity can conclude such an agreement:
Therefore, the first thing that must be done when concluding a financial lease agreement is to check the license availability and study the internal rules for providing this financial service (i.e. re-read the agreement and study the company's policy).
So, knowing what financial leasing is and its subtleties, it will be easier for you to navigate this type of service and use it. Leasing can be a great solution for an entrepreneur who is starting a new business or just expanding.
It allows you to quickly get what you need (goods, vehicles, or premises), with a minimum investment and relatively small interest, and even save on taxes. And if you see that this option will help the development of your company and transparent and legal conditions are offered, take this opportunity.
