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Understanding Lease As One Of Your Options In Car Financing
Lawrence Gitman defined leasing as an option that enables one to obtain the use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments. The lessee is the receiver of the service of the assets under the lease contract while the lessor is the owner of the assets. There are two basic types of lease: the operating lease and financial lease. Operating lease is normally a contractual arrangement and is a common arrangement for obtaining short-lived assets such as automobiles. So we will be discussing more of operating lease as a car finance option. This is a car finance option whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset’s services. Such leases are generally cancellable at the option of the lessee, but he or she may be required to pay a penalty for cancellation. Assets that are leased under operating lease have a usable life than is longer than the term of the lease. Let us say, if the car has a usable life of 5 years, then the lease agreement for its car finance will usually end after 3 or 4 years. If an operating lease is held to maturity, the lessee at that time returns the leased asset to the lessor. The lessor then will either lease it again or sell the asset. Normally, at the termination of the lessor, the asset still has a positive market value. In some instances, the lease contract gives the lessee the opportunity to purchase the leased asset. Generally, the total payments made by the lessee to the lessor, are less than the lessor’s initial cost of the leased asset. The lessor here will likely to be the manufacturer’s leasing subsidiary or an independent leasing company. Let’s say, if the manufacturing cost of the car is $15 000, then the lessee will approximately pay $12 000 for leasing the car. Lessors use three primary techniques for obtaining assets to be leased. The method depends largely on the desires of the lessee. One is a direct lease result when the lessee did not previously own the assets that is leasing and he only acquired it from the lessor. The other one is a sale-back arrangement, the lessor acquire leased asset by purchasing assets already owned by the lessee and leasing them back. The lessee receives cash for the asset immediately by selling an existing asset to a lessor and the leasing it back, while obligating itself to make fixed periodic payments for the use of the leased asset. Leasing arrangement that include one or more third-party lenders are called leverage lease. The lessor here acts as an equity participant supplying only about 20% of the cost of the asset, and a lender supplies the balance. This kind of arrangement is popular in structuring leases of very expensive assets. A lease arrangement typically specifies whether the lessee is responsible for maintenance of the leased assets. Leasing the car normally requires the lessor to shoulder maintenance expense, insurance, and tax payments. The lessee is usually given a renewal option to renew a lease at its expiration or to purchase it. This option grant lessees the right to re-lease assets at expiration and are common in operating leases such in leasing a car, because their term is generally shorter than the leased asset at maturity. Purchase options on the other hand, allow the lessee to purchase the leased asset at maturity, typically for a predetermined price. Understanding lease will help you assess if it is the better option in buying a new car for you or not. Decisions still depends on you but being knowledgeable with the choices being offered to you, can help you choose the better car finance option that is best for you. Article Directory: http://www.articledashboard.com Brayden Cox is a sport enthusiast and a car lover. He usually browse sites that could provide him unbiased Car Reviews and best Car Finance option to be sure that the car he'll be buying is indeed worth and is best for him. |
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