How does leasing work?
You can choose to purchase or lease car or other assets, but do you really understand what leasing is and why it works for you and the leasing company?
September 30, 2019
Contract Hire compared to Outright Purchase
Vehicle leasing is a method of getting use of a vehicle you don’t actually own, cheaply, and for a period of time governed by the contract you have. It is cheaper than buying the same vehicle outright for the user, as you the user is not taking ownership of the vehicle for the full length of its working life, rather leasing it for a period of that life. That means the person / company that actually owns that vehicle could have a future life with it or resell the vehicle afterwards to realise further value from it.
So who owns your lease vehicle?
The funding house owns the vehicle. The funding house is quite often a bank or major investment firm because running a fleet of vehicles requires a very large outlay of capital.
Why would a funding house want to own the vehicle I use?
Contract hire allows funding houses to own very large numbers of vehicles so long as they has the investment capital. The benefits of volumes of scale allow the funding house to invest en-masse in vehicle servicing, maintenance servicing, tyres, management systems, resale processes, purchasing power, etc. In short if a company becomes professional and expert in buying a vehicle, runs it well and cheaply in-life and sells it better at the end than the individual... there is money to be made and everyone benefits.
Benefits to you - Leasing over Outright Purchase
- You are not taking the risk of vehicle value – the funder is.
- You often only need to insure and fuel the car (if you include maintenance, servicing, tyres, breakdown etc. in your contract).
- Expert help when you need it and, due to buying power, a funder usually has influence on the manufacturers.
- You know every month what you are financing out – regular rentals.
- You can hand the car back in a set number of years and have a new one.
- You can afford a better car than outright purchase method.
- Better cash flow as paying large sums of money through outright purchase on a depreciating asset is not necessarily beneficial for individuals or businesses - the alternative being lower regular payments... and money in the bank may be better utilised.