Types of Asset Finance Explained

Asset finance is a term used for a number of more specific finance packages that we provide, you can find out more about the main types of finance below.

Hire Purchase

Hire purchase is probably a term we all know well, it is the most common and readily available credit facility. In basic terms, you find the product you need and you negotiate the purchase price with the supplier. Usually you will then be required to pay 10 -20% deposit to the finance company, they will then take title direct from the supplier. The finance company will have the legal right to the product and even though you are technically not the owner of the asset during the agreement, subject to eligibility you can still claim the writing down allowances as though you had made the purchase outright yourself.

There is usually a documentation (or administration, arrangement) fee of £100-250 which you will be required to pay along with the full purchase VAT. You will then, subject to eligibility, be able recover the VAT yourself. The outstanding amount as well as interest is then paid be you in pre-agreed instalments over the period of an agreement.

At the end of the agreement period you obtain title through the payment of an 'Option to Purchase Fee'. This fee is often a token gesture to transfer title, but note some finance companies do still charge a significant fee of £10-150. You will find Hire Purchase agreements are based on either a fixed or variable rate. You should be aware that you can include a balloon payment in order to reduce the amount you have to pay each month. A balloon payment is a large pre-agreed amount that is paid by you right at the end of the finance term, this large payment will ensure all your finance commitments are full paid back.
Understandably a balloon payment amount is something that you should be sure you will have at that period of time otherwise you will be breaking you finance agreemant with the finance company.

Lease Purchase

Lease Purchase is virtually the same as Hire Purchase with a slight differnce, that difference being that instead of paying a deposit of 10-20% you would pay a deposit as a multiple of the repayments. The outstanding balance and interest is then repaid in instalments. The number of instalments is defined by the pause.

If a hire purchase agreement had a 10% deposit followed by 36 monthly repayments: then the equivalent Lease Purchase could have a profile of 3 payments in advance followed by 33 monthly repayments if (Terminal Pause) or 35 monthly payments if (Spread Pause).
Terminal Pause: refers to a payment profile for your contract or agreement for example: if on a 36 monthly payment agreemant you pay 3 payments up front, then after 33 months you would have 3 months payment free period.
Spread Pause: if 3 payments are made up front and then a further 35 or more monthly payments are made (with the overall cost remaining the same as Terminal Pause), then the monthly cost can be lowered.

Your eligibility for the VAT and writing down allowances is exactly the same as for hire purchase, and you should expect the fee structure to be the same.

Again, Lease Purchase agreements are based on either a fixed or variable rate, and the monthly commitment can be reduced by the inclusion of a balloon payment (a repayment of the outstanding principal sum made at the end of a loan period, interest only having been paid hitherto)

Finance Lease

With a finance lease contract the finance company takes full ownership of the asset and then rents the goods to you over a predetermined period of time. The finance company can claim the writing down allowances and may then convey this benefit to you by reducing the rentals.

It also worth noting that the purchase price that is being used to calculate the rental is the purchase price net of VAT. Thus, if you are looking to acquire a VAT qualifying car, if leased the rental is calculated on the net price of the car and not the gross price if funded by Hire Purchase.

Generally, with a finance (or capital lease), you (the lesee) will source the supplier of an asset, and having paid the documentation fee and an initial payment of a multiple of rentals, all of the remaining cost of the asset is then spread over the agreed primary period in accordance with any pause agreed.

The rentals attract VAT that can be recovered subject to eligibility. As the finance company is the owner of the asset, you will not need to pay the purchase VAT at the beginning.

Again a balloon payment can be agreed (as with Hire Purchase), in order to reduce the cost of the primary rentals. At the end of the agreement you may have the option to enter into the secondary period. As you have generally covered the entire capital cost of the asset and hire charges (interest) in the primary period, should you wish to continue to use the asset, a secondary otherwise known as a peppercorn rental would be charged. Typically this rental approximates to be around 3% of the original cost and it is a one off annual payment.

Finance Leasing means you are not the owner of the asset, therefore you cannot sell the asset during the rental period. However, as you are generally covering the total cost and hire charges within the primary period, you will be entitled to a share of the sale proceeds should the leasing company allow you to sell on their behalf. Your share of the sale proceeds is usually agreed at the beginning and is typically 95-99%

Operating Lease

The only difference between an operating lease and a Finance Lease is that the an operating lease is a lease whose term is short compared to the useful life of the asset or equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. The lessor gives the lessee the exclusive right to possess and use the leased asset for a specific period and under specified conditions, but retains almost all risks and rewards of the ownership.

Due to the fact that the asset needs to be sold on at the end of the primary period to recover the residual value, it is very rare for an operating lease to have a secondary rental period. In some instances the funder may structure a finance lease for you to 'wash-out' the residual position.

With an Operating Lease you may source the supplier, but it is often the case that the leasing company can acquire the asset for you cheaper (for example car leasing companies). You will have to pay any documentation fee and an initial payment of a multiple of rentals. The rentals attract VAT that can be recovered subject to eligibility. As the finance company is the owner of the asset, you will not need to pay the purchase VAT at inception.

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