AFP - Asset Finance Products
- When commercial organisations, whether sole trader, large corporation or public sector, wish to invest in tangible assets, they usually need an affordable, secure means of finance. Asset Finance is the third most common source of finance for businesses, after bank overdrafts and loans.
- The two main forms of Asset Finance are Hire Purchase and Leasing.
HP - Hire Purchase
- Hire Purchase is a well-established method of financing for companies that wish eventually to take ownership of business assets.
- The finance company buys the asset on behalf of the customer, who then pays an initial deposit. The remaining balance, plus interest, is then paid over an agreed period. During this period, ownership rests with the finance company, who is effectively hiring use of the asset to the customer.
- Once the final payment is made, ownership transfers to the customer.
L - Leasing
- Under a commercial agreement, the leasing company (known as the lessor) buys and owns the asset.
- The customer (or lessee) then hires use of the asset, paying rental over a fixed period. At the end of the contract, the customer usually has a choice of extending the lease, buying the asset or simply returning it.
- There are two main types of leases, namely Finance Leases and Operating Leases.
FL - 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.
OL - 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, e.g. transportation assets. 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.
PCP - PCP or Personal Contract Purchase
This is a very popular method of buying a vehicle especially if you change your vehicle regularly.
A PCP typically can be set for a period of 3, 4 or 5 years.
The finance company sets a future value (FV) of the vehicle and you pay the rental plus interest on the remaining figure. Say your vehicle was £42,000 a future value was projected as £20,000.
You are borrowing £22,000 at a certain Annual Percentage Rate (APR). Which is the interest you will pay over the time period you’ve chosen. Say this was 4yrs (48mths) and the interest paid over that time was £10,000. Add the amount borrowed (financed) @ £22,000 = £32,000 and divide by 48 (mths) = £666 a month.
The remaining amount (the future value) in this case £20,000 this is known as a balloon payment, if you want to own the vehicle at the end you can make that final payment. If not, you can return the vehicle.
Sell the vehicle at any point in between and the interest payable is calculated daily on what you must repay to the finance company.
PHP - Personal Hire Purchase
Using this method of purchase, you will usually be asked to provide a deposit. Then the entire value of the vehicle is calculated over the length of the agreement. When the Hire Purchase agreement ends, you own the vehicle.
Monthly payments will be higher than a PCP as you are financing the entire value of the vehicle.
PCH - Personal Contract Hire
This becomes suitable if you don’t wish to own the car and simply wish to rent it for a set period. Simply agree the rental terms, the payments are set each month. Hand the car back when complete.
There’s no option to buy, you will agree a set mileage and an ‘overs’ fee per mile should you exceed it. Should you wish to break the agreement early, you may do so but there may be significant charges, check the small print!
CL - Car Leasing
This is becoming increasingly popular due to the ease and simplicity in today’s society where people simply budget a figure for a vehicle and continue to pay month on month, upgrading as soon as they can and keeping to the same monthly payments but getting a newer vehicle.
Essentially, you are renting a vehicle for a set period, without having to worry about how much the vehicle devalues the minute you drive it out of the showroom; however, you will not own the vehicle.
The hire package will usually include any maintenance fees, the road fund license and no hassle in trying to sell it when you are complete, simply hand it back.