When it comes to acquiring a vehicle or equipment for commercial use, businesses have two popular options: finance lease and contract hire. Both arrangements allow businesses to access the assets they need without the burden of hefty upfront costs or ownership risks associated with outright ownership. However, finance lease and contract hire are not the same, and businesses need to understand the differences before choosing the right option.
Finance Lease
A finance lease is a type of lease agreement that gives businesses the right to use an asset for an agreed timeframe. However, unlike a rental agreement, finance lease agreements can span the entire economic life of the asset. In a finance lease, the lessee (business) pays for the asset over the lease term, including interest.
The business does not own the asset during the lease term, but it assumes the risks and responsibilities of ownership. The business is also responsible for the maintenance, insurance, and repair of the asset. At the end of the lease term, the business can choose to purchase the asset, extend the lease, or return the asset to the lessor (owner of the asset).
Finance leases are ideal for businesses that need an asset for a long-term project or plan to use the asset for its entire economic life. It offers great flexibility as it allows businesses to customize lease terms, including rental payments and lease periods.
Contract Hire
A contract hire is a type of leasing agreement that allows businesses to access an asset for a specified period without the risks associated with ownership. In a contract hire, the lessor (owner of the asset) retains ownership and responsibility for the asset throughout the lease period. The lessee (business) pays a fixed monthly rental fee for the use of the asset.
The monthly rental fee covers the cost of the use of the asset, servicing, and maintenance. The lessee is also responsible for insuring the asset and returning the asset to the lessor at the end of the lease period.
Contract hire is a great option for businesses that need assets for a short-term project or require regular upgrades. It offers fixed rental payments, predictable costs, and the ability to return the asset at the end of the lease term without worrying about any residual values.
Conclusion
In summary, finance lease and contract hire are both popular leasing agreements that can help businesses acquire assets without ownership risks. Finance lease offers businesses the flexibility to customize lease periods and rental payments, while contract hire provides fixed rental payments and predictable costs. Businesses should carefully consider their needs and evaluate both options before deciding which option is best suited to their business.
