Leasing is a financial arrangement where one party (the lessor) allows another party (the lessee) to use an asset for a specified period in exchange for regular payments calculated by leasing rates in Sri Lanka. This arrangement can apply to various assets, such as real estate, vehicles, machinery, or equipment. Leasing is a popular option for individuals and businesses that need access to expensive assets without purchasing them outright, rather than getting a personal loan in Sri Lanka to purchase such items.
Key Concepts in Leasing
Lessor: The owner of the asset who grants the lease.
Lessee: The party that obtains the right to use the asset under the lease.
Lease Agreement: A contract outlining the terms and conditions of the lease, including the lease duration, payment schedule, maintenance responsibilities, and other relevant details.
Lease Term: The duration for which the asset is leased.
Lease Payments: Regular payments made by the lessee to the lessor, typically on a monthly basis.
Residual Value: The estimated value of the asset at the end of the lease term.
Depreciation: The decrease in the value of the asset over time due to wear and tear.
Types of Leases
1. Operating Lease:
· Short-term lease (typically less than the useful life of the asset).
· The lessor retains ownership and maintenance responsibilities.
· Lease payments are considered operational expenses for the lessee.
· Common for equipment, office spaces, and vehicles.
2. Finance Lease (Capital Lease):
· Long-term lease (typically close to the useful life of the asset).
· The lessee assumes some ownership responsibilities, including maintenance.
· Lease payments are treated as capital expenses, and the asset is recorded on the lessee's balance sheet.
· Common for high-value equipment and property.
How Leasing Works
· Asset Selection: The lessee identifies the asset they need and finds a lessor willing to lease it.
· Negotiation: The lessee and lessor negotiate the terms of the lease agreement, including lease term, payment amounts, maintenance responsibilities, and any additional terms.
· Lease Agreement: Both parties sign the lease agreement, making it legally binding.
· Asset Usage: The lessee uses the asset as per the lease terms. Depending on the lease type, the lessee may be responsible for maintenance and repairs.
· Lease Payments: The lessee makes regular lease payments to the lessor according to the agreed schedule.
· End of Lease Term: At the end of the lease term, several options are available:
· Return the Asset: The lessee returns the asset to the lessor.
· Purchase the Asset: The lessee may have an option to buy the asset at a predetermined price (common in finance leases).
· Renew the Lease: The lessee and lessor may agree to extend the lease for an additional period.
Advantages of Leasing
· Lower Upfront Costs: Leasing requires less initial capital compared to purchasing the asset outright.
· Flexibility: Leases can be tailored to meet specific needs, including short-term or long-term arrangements.
· Cash Flow Management: Regular lease payments help in budgeting and managing cash flow more predictably.
· Maintenance: In operating leases, the lessor often handles maintenance and repairs, reducing the lessee's responsibilities.
Disadvantages of Leasing
· Total Cost: Over the long term, leasing can be more expensive than purchasing the asset.
· No Ownership: The lessee does not own the asset and thus does not benefit from its appreciation or resale value.
· Restrictions: Lease agreements may include usage restrictions and penalties for early termination.
Leasing is a versatile financial arrangement that allows individuals and businesses to use assets without the burden of ownership, making it a viable option for managing expenses and maintaining operational flexibility.
For those having leasing facilities, they are able to check their balances and other details through the best online banking in Sri Lanka, in addition to getting other information like fixed deposit rates in Sri Lanka, savings rates etc.
How to choose a good financial institution for leasing purposes
Choosing a good financial institution for leasing purposes involves careful consideration of several factors to ensure you get the best terms and service. Here are key steps to help you choose the right financial institution for leasing:
1. Assess Your Needs
· Type of Asset: Determine what type of asset you need to lease (e.g., vehicles, equipment, real estate).
· Lease Term: Decide on the lease duration that suits your needs.
· Budget: Know your budget for lease payments and any potential additional costs.
2. Research Financial Institutions
· Reputation: Look for institutions with a good reputation and strong financial stability. Check reviews, ratings, and testimonials from other customers.
· Specialisation: Some institutions specialise in certain types of leases (e.g., auto leases, equipment leases). Choose one that has expertise in the asset you need.
3. Compare Lease Terms
· Interest Rates: Compare interest rates offered by different institutions. Lower rates mean lower overall costs.
· Payment Flexibility: Check if the institution offers flexible payment options that match your cash flow.
· Residual Value: Look at how residual value is calculated and if it seems reasonable for the asset you are leasing.
4. Evaluate Customer Service
· Support and Communication: Assess the quality of customer service. A good institution should be responsive and helpful.
· Transparency: Ensure the institution provides clear and detailed information about lease terms, fees, and conditions.
5. Check for Hidden Costs
· Fees: Be aware of any hidden fees such as administrative fees, early termination fees, or penalties for exceeding usage limits.
· Insurance and Maintenance: Understand who is responsible for insurance and maintenance costs. Some leases include these in the terms, while others do not.
6. Review the Lease Agreement
· Legal Terms: Have a legal advisor review the lease agreement to ensure there are no unfavourable terms.
· Flexibility: Look for clauses that allow flexibility, such as the ability to extend the lease, purchase the asset, or terminate early under certain conditions.
7. Look for Added Value
· Additional Services: Some institutions offer added services such as maintenance packages, training for equipment use, or upgrade options.
· Rebates and Incentives: Check if there are any promotional offers, rebates, or incentives that can reduce your leasing costs.
8. Get Recommendations
· References: Ask for references from the financial institution. Speaking with other clients can give you insight into their experiences.
· Professional Advice: Consult with financial advisors or industry experts for recommendations on reliable institutions.
9. Consider Local vs. National Institutions
· Local Institutions: May offer personalised service and better understanding of local market conditions.
· National Institutions: Often have more resources, a wider range of leasing options, and potentially better rates due to larger scale operations.
10. Conduct Due Diligence
· Regulatory Compliance: Ensure the institution complies with all relevant regulatory requirements and industry standards.
· Financial Health: Review the financial health and stability of the institution. This can be done by checking their financial statements or credit ratings.
Example Institutions
