When inflation is high, people look for ways to fight it. Of course, you can cut expenses and reduce the cost of living. But did you know that you can spend and make money on it? This is precisely the biggest advantage of leasing. In this article you will learn about lease financing definition, whether car leasing is a good method of financing, and what you need to watch out for when signing a contract. It's time to learn about the service that drives the entire economy today.
Lease financing definition
Leasing is a special form of financing. It consists in the fact that the funding company buys an object, which it lends to its customer. The lessor's customer agrees to pay regular installments. At the end of the lease agreement, a customer can leave the object to the lessor or buy it back.
The most popular type of leasing is car leasing, but the banks' offer is much broader. You can lease a yacht, tools, a computer or a plane. Unfortunately, this is a financial product usually intended for companies, and the leased equipment should be used for business purpouses.
Types of lease financing
There are several forms of leasing. They vary in installment size, duration and application. You must choose wisely, so here is a list of the most relevant ones:
Finance leasing or Capital leasing
Finance leases are long-lasting. They can last more than 10 years, but 36 months is considered the minimum. The lessor no longer wants the leased item, so at the end of the contract you must buy it back or spread the remaining amount in installments.
The lease company often agrees to return you for the upkeep of the equipment. However, you must take care of insurance, service and maintenance during the term of the contract. In financial statements, the leased equipment is treated as a capital item or as a purchase, and any VAT is charged at the beginning of the lease agreement. Finance leasing is quite similar to a mortgage.
Operating leasing
This is a solution dedicated to people who do not want to use equipment for its entire working life. Operating leasing lasts from 12 to 60 months, and usually its interest rate is higher than for finance leasing. Expenses related to maintenance and insurance of the leased object are covered by the bank, and VAT is shared in each installment. Leased object is not disclosed in the balance sheet.
Consumer leasing
Although leasing is a financial product aimed mainly at companies, banks are increasingly choosing to give them to individuals. The more common form is operating leasing, and the terms of the contracts tend to be worse. This is due to the higher risk for the lessor.
Long-term hire
Long-term hire is increasingly common in Europe. Although it's not exactly leasing, due in part to the use & give model, rental is often considered a great alternative.
How to choose the best offer
There are many leasing companies, and the offers can vary dramatically. To avoid unnecessary expenses, you can use the lease calculator and offer comparison engines. They will allow you to check whether a particular offer is attractive or rather not.
Lease calculator
If you want to buy a car and have decided on a specific model, you can use this calculator. With its help you will see how much the sample monthly installment is, what the total leasing costs are and what price of the car you are interested in can be considered good.
Lease comparison
If you don't have a strict preference for a car model, you can use lease comparison to make your choice. Comparators often allow you to choose a specific financing company, maximum installment amount or waiting time for the car. Of course, there are also comparison sites for other items.
Lease advisors
There are also firms that prepare offers from various lessors. Usually their help is free, since they earn money on a commission model. To find an advisor, just type "lease advisor" and the name of your city into google.
Leasing a car vs buying
We focus on cars for a reason. They are undoubtedly the most frequently leased items, which is due to their high initial value. Also, nearly every company needs a car now! Companies such as Progressive Leasing offer financing for almost any item, including furniture, but offers aren’t really attractive. When thinking about a car, you should find a lessor that deals only, or mostly, with cars.
Of course, every loan comes with an interest rate. Inflation in many countries is as high as 10 per cent and more. It means that interest-free loans mean a big loss for the company providing it. However, this does not mean that leasing is not profitable for buyers. Here is a list of the advantages and disadvantages of leasing:
Pros of leasing
- Instead of paying the full price now, you give up a small part of it every month. It is extremely important when you buy expensive equipment like a car
- By spreading the repayment over several years, you can manage the money you would have had to spend on the purchase
- With an operating lease, you don't have to worry about insurance and upkeep
- You don't have to worry about selling a leased item
Cons of leasing
- If you have cash flow problems, you will lose the leased item
- The leasing company may not agree to unusual configurations and models of cars. Otherwise, it may offer very unfavorable financing terms
- The lessor may require additional insurance or warranties
- If you decide not to buy the leased item, the total cost of use will be higher than if you bought it with cash.
Pros of cash buying
- Buying a car with cash is a step to financial freedom, as you are not getting into debt
- If you have managed to raise the money to buy a car, maintaining shouldn’t be a problem
- By owning a car, you increase your net worth. You also avoid the risk of losing your vehicle in the recession
Cons of cash buying
- Spending tens of thousands of dollars dramatically affects your cash flow
- In some countries, cash buying is less tax-advantaged
- If you pay in cash, you will not gain from inflation because you do not spread the payment over time
So what should you choose? First of all, opt for leasing only if a one-time outlay of a large sum will negatively affect your earnings. If you want to spread the payment into installments in order to buy a more expensive model, you are taking redundant risk. However, it is your money you have at your disposal, and you should make decisions entirely on your own. Are you interested in Finance? Be sure to check other articles on our blog!
