We can generally distinguish three major types of equipment leasing: finance leasing, operating leasing and contract hire. Although strictly speaking not a type of leasing, we also include hire purchase in the following discussion:

• Finance Leasing (Full Payout Lease). You effectively acquire all financial benefits and risks without actually acquiring legal title. The equipment leasing rate is computed to collect the full value of the asset (plus finance charges) during the contract period. At the end of the equipment lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time - unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods will be minimal (sometimes referred to as "peppercorn rental").
  
  
• Operating Lease. Often with a shorter time frame than financial leasing (always significantly shorter than the working life of the asset), operating leasing is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end (this negotiation can only take place at the end of the initial rental period). As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.
  
  
• Contract Hire. A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if asset is in repair.
  
  
• Hire Purchase. This is an agreement for the hiring of an asset with an option to purchase. The legal title will pass to you when all payments have been made. The term of a hire purchase must be significantly shorter than the working life of the asset. You are able to claim capital allowances as if you had purchased the asset outright, gaining immediate use of it. Hire Purchase agreements are typically written for domestic users, not so much for business users.

All types of financing offer different advantages and it is important that you assess your circumstances and needs before committing to a specific finance contract. Click here for a brief comparison.

It is wise to make sure you are getting the correct type of equipment leasing package. For example, if you:

• want to own the asset straight away, an outright purchase (cash or loan/overdraft) might be appropriate;
  
  
• may want to own the asset at some point in time and want to take advantage of instalment payments, hire purchase might be the best option;
  
  
• do not want to own the asset at all but require it for most of its useful life, consider a financial lease; and
  
  
• require the asset for a period of time significantly shorter than the useful life of it, consider an operating lease.

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Leasing