Ted Hickman

What is car leasing and why is it needed?



Acquisition of the desired car often leads the buyer to the question – which way is the most profitable for this? Organizations and entrepreneurs do not always have free funds to buy new vehicles. It can be problematic to apply to financial institutions for a loan, since the requirements for the bank’s customers are very strict, and the interest rate is quite high. The way out of this situation will be the purchase of equipment or a car on a financial lease or, in other words, leasing.

Car leasing implies a long-term lease, under the terms of which the lessee pays monthly payments, including payment for the vehicle (TC), lease and interest, but at the same time, after the end of the contract, becomes the full owner of the leased property. A distinctive feature of car leasing is tax optimization. That is why this financial instrument is so popular among legal entities. Under a lease agreement, the lessor also provides a full range of services, which, for example, would require additional costs for car loans:

  •  enters into a car sale and purchase transaction with a car dealer;
  •  carries out registration of the vehicle;
  •  draws up a vehicle insurance contract (OSAGO, CASCO);
  •  pays transport tax.

The purchase of commercial vehicles, special machinery, or equipment on lease allows legal entities and entrepreneurs not to withdraw significant funds from the organization’s turnover, allows you to save on taxes, and at the same time carry out work activities, increasing income. This is all made easier with the technology available in this day and age, with there being countless places to find helpful info about fleet management, and commercial vehicle software, as examples.

What does Leasing mean?

Leasing is a set of legal relationships that arise during the conclusion and implementation of a lease agreement, including the acquisition of the subject of such an agreement. In other words, leasing is an economic instrument that allows the lessee to use a vehicle on the terms and conditions stipulated in the contract with the right to redeem it. In this case, the lessor undertakes not only to purchase the car chosen by the lessee from the car dealer, but also to provide this property for temporary use to the client for a set fee.

Note! Only after the expiration of the lease agreement, the user who bought the vehicle on lease will be the owner when paying the residual value of the car. Until that moment, the lessor will be considered the owner.

What are the advantages and disadvantages of car leasing

Having decided to use the scheme of leasing transactions when buying a car, you must clearly understand all the advantages and disadvantages of this financial instrument. For whatever needs, production or for personal use, the vehicle is leased, the client will receive additional services in the form of car insurance, luxury tax, etc., which will be included in the lease payments, thereby distributing the costs evenly. the entire term of the contract. Do not forget the fact that not all organizations, especially at the initial stage of their formation, have significant assets for the acquisition of equipment. Leasing allows you not to withdraw significant working capital and to purchase the necessary equipment, special equipment or a commercial vehicle on favorable terms. But these are not all the advantages of leasing:

  • application of the accelerated depreciation mechanism, including with a threefold coefficient;
  • availability of tax preferences;
  • development of a convenient individual scheme for repayment of payments, providing for the activities of the organization, including seasonal work;
  • tight deadlines when drawing up a contract;
  • less stringent requirements for clients when providing the necessary documents;
  • the ability to purchase several cars at once;
  • the ability to update fixed assets;
  • After the expiration of the lease agreement, you can change the car to a new one.

Note! The use of leasing programs when buying a car allows you to take advantage of tax preferences, which can total up to half of the cost of the vehicle.

With very attractive advantages, the purchase of equipment on lease has a number of disadvantages:

  •  the leasing company remains the owner of the leased asset;
  •  the right to sublet the vehicle is possible only with the permission of the lessor in the agreed cases;
  •  There are no tax benefits for individuals.

Taking into account that the borrowed funds obtained with the help of a loan for the purchase of transport do not allow to return even a part of the spent monetary assets of the organization, leasing is a universal solution, especially for small and medium-sized businesses.

Interested in leasing a car but need down payment? You can sell your old car at Cars Wanted Newcastle for top cash and use it to lease a new car.

Conditions and benefits

To attract customers, many leasing companies use unique leasing schemes that take into account the wishes of customers. Often the terms offered include:

  • the lessee independently chooses one of the basic settlement schemes or discusses the individual terms of the contract;
  •  the lessor provides additional services, including all types of car insurance;
  • a preliminary decision can be made even on a minimal set of documents.

Favorable leasing terms for organizations and individual entrepreneurs will make it possible to significantly save the company’s budget: return VAT and apply a three-fold depreciation rate, which will ultimately greatly reduce the cost of the vehicle’s redemption value. At the same time, if the activity of the enterprise is of a seasonal nature of work, it is possible to use the optimal payment schedule, drawn up taking into account these features of the business. The distribution of payments can be carried out both taking into account the wishes of the client, and evenly.

Leasing for legal entities

Organizations and entrepreneurs do not always have free cash assets to purchase the necessary equipment and technology for their business. Buying a car on lease in this case will be the solution to this problem. The lessor, when executing the specified agreement, may act as a balance holder, and in the financial statements of the lessee-organization, such a purchase will be recorded in the expense column. This will allow to reduce taxes and redirect finances to the development of the enterprise.

Note! In the event of a delay in payment, the lessee runs the risk of being left without a vehicle, since the lessor has the right to withdraw it from use on a specified basis.

The main advantage of leasing for legal entities is accelerated depreciation, which allows not only to reduce the size of the tax rate on profits, since there is an increase in the amount of deductions for depreciation, but also helps to reduce the residual value of the car.

Car leasing scheme

The scheme for buying a car on lease involves several stages:

1. Choosing a car: the buyer independently chooses a supplier or selects a leasing company from the list of proposed suppliers, and also selects a car.

2. Collection of documents: the buyer provides the leasing company with the required package of documents and an application.

3. Making a decision: the lessor reviews the application and makes a decision on the conclusion of the transaction.

4. Execution of the contract: the lessee and the lessor enter into a lease agreement, and the lessor and the car dealer conclude a purchase and sale agreement.

5. Down payment: the lessee makes a down payment.

6. Transfer of the vehicle: the leased vehicle is transferred to the use of the client.

7. Payment: the lessee makes monthly installments according to the established payment schedule within a specified period.

8. Ownership: after the fulfillment of obligations, the ownership of the car passes to the lessee.

The leasing scheme provides for the presence of three parties to the transaction: the lessor, the lessee and the dealer.

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