Types of Leasing

There are two main types of lease: Finance Leases and Operating Leases.

Finance Leases

Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period – considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced, or ‘peppercorn’ rate, at the end of the contracted period.

As you are not the owner of the asset, you cannot sell the asset during the rental period.

The finance company can claim the writing-down allowances and pass this benefit to you in reduced rentals.

Operating Leases

An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.

The lessor carries the risk associated with the residual value of the asset at the end of the lease.  

This type of lease is often used when the asset is likely to have a resale value, for example, aircraft and vehicles. The customer gets the use of the asset, sometimes along with other services. Operating leases are particularly attractive to companies that frequently update or replace equipment and want to use equipment without ownership.

The most common form of operating lease in motor finance is contract hire, particularly in the provision of vehicle fleets.