Leasing Offers

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Leasing Workflow

Step 2 – Offer

We can come across all sorts of offers on the market:

Some are more tempting than others:

Some are simpler:

Some are exptremely detailed:

… and of course many leasing offers may be generated online:     .

A legal framework also exists (in Bulgaria similar to other countries) which defines exactly some of the leasing offers, their requisites, calculations, etc. –  for details please read “The Consumer Credit Act” or the “Consumer Real Estate Credit Act”.

We will examine the necessary offers and the reason for their necesity.

The necessary offers for each leasing deal are minimum three: asset offer from the vendor, leasing offer form the leassor and insurance offer from the insurance company. For operational leases a fourth offer is also needed, which will be included in the lease calculation – an offer for the additional services, their scope and price.

It is possible, and actually quite common, that some of the offers are combined and even all of them to be collected into one. Having said this it is important to know that if the lessee wants to make an “informed dicision” it is advisable to have all the enumerated offers. Their combination into one always takes tall on important for the decision details.

  • Asset offer

Here we are not looking into various promotional offers, promises and commercials which you can come accross. What you will need in the next stps of the leasing workflow is a good old-fasion offer which has the following requisites:

  • Asset description,
  • Additional equipment included,
  • Price,
  • VAT,
  • Guarantee,
  • Term of delivery,
  • Payment terms
  • Name of vendor.

It is possible that the offer includes much more detail (the last offer which we received from the Bulgarian Ford dealer Moto Phoe was five pages long), but the above requisites are the most important, which will be studied in detail by the leasor and which will have their impact on the following steps of the leasing workflow.

Furhter to the exact description of the asset, which we have chosen to lease, the most important requisite in the offer is it’s price and respective VAT. The leasing, as a form of financing the purchase or use of the leasing asset, “steps” exactly on these two values. Their exact determination is necessary, in order to calculate the initial installment, the leasing interest, fees, insurance premium, etc. The various types of leasing have a different approach to VAT, its invoicing, payment and deferral. In our article “Leasing Interest“ we will show how to calculate or check the calculation of the leasing interest and in the article “Types of Leasing” we will examine the various approaches to pricing and VAT, which the various types of leasing employ. Here it will suffice to say that it is important that we know the exact price of the leasing asset and its respective VAT.

  • Leasing Offer

The leasing is a financial service. Just as we would compare prices, terms and quality of various services which we use, it is reasonable to compare the offered leasing services. This is only possible if we have a “leasing offer” or yet better – several leasing offers from various leassors.

The leasing offer starts where the asset offer ends. The leasing offer is drafted by the potential leassor based on the leasing application received from the potential lessee. The „application“ itsself is not always a formal document. It can take the form of Q&A between the leassor and lessee in the form of a dialogue. Then again it could be fully digitalized (as it is in this site) and totally lessee-driven based on some predetermined variables. The main requisites of the leasing offer and the respective basis for the latter questions are:

  • Pairing with the asset offer;

Each leassor has various policies to various asset groups. It is also possible the application of various interest rates for each individual asset group. The reason is the utility of the leasing asset as collateral of the leasing transaction. Respectively each leasing offer is linked to a specific asset or at least an asset group (e.g. “cars”).

  • Purchase price and VAT;

This is an important requisite. Based on the purchase price from the asset offer (the amount which the vendor will receive for the sale of the asset), the calculation of all financial requisites of the whole transaction is effected – initial installment, leasing interest, residual value, insurance premium, leasing fees, etc.

VAT treatment of the sale is also very important. Usually VAT is due and paid to the vendor upon the purchase. If this is not the case, this should be emphasized at the offer-level. Furhter it is important to note what sort of VAT treatment is offered in the leasing transaction. We look into further detail in the article “Types of Leasing”.

  • Type of leasing;

Following the above, we note that the various types of leasing offer various treatment of VAT accrual and payment. Further the various types of leasing employ different accounting treatment, asset risk treatment, ownership treatment, etc. It is important that the leasing offer should precisely mark the type of leasing offered.

  • Initial installment;

In order to reduce the risk, when treating the leasing asset as collateral to the lease transaction, the leassor usually requires payment of an “initial installment” (down payment) by the lessee in the beginning of the leasing transaction. Often the payment of the initial installment deems the leasing contract as active. The initial installment most often is calculated as a percentage of the purchase price. With it, depending on the type of leasing used, part or the whole VAT for the transaction is added.

  • Leasing term;

The leasing services defers payments for the purchase of the leasing asset. An important requisite of the leasing offer is the term for the offered leasing. The term is usually measured in months, which are multiples of 6. Currently the limits of the leasing terms are from 12 to 72 months. The longer leasing terms may be found chiefly in real estate leasing.

  • Various fees (if any);

The logic behind the fees (should be) not so much profit for the leasor, but rather a compensation for certain expenses incurred in connection with the leasing transaction. Such may be a registration fee for a car in the Police, notary fees for ownership transfer, administration and correspondence fees for the leasing contract, etc. Fees may be either a fixed amount or a certain percentage (currently fees up to 1.5% may be found) from the purchase price of the transaction.

  • Insurance premiums for the mecessary insurance policies for the first year

As the leasing contract will require the existence of certain insurance policies, it is reasonable that the insurance premiums due, should be disclosed in the leasing offer. As the prices for the insurance change from year to year it is usually difficult to forsee the insurance premiums needed for the years following the year of signing of the leasing contract. Therefore the leasing offers usually show the insurance premiums for the first year of the leasing term. It should be expected that they will be also due in the forthcoming years, even if not disclosed in the initial offer.

„Operational leasing“ and „open end leasing“ utilize a residual value amount in the end of the leasing term. The residual value is usually measured as a percentage of the purchase price and represents this portion of the price of the leasing asset, which remains unpaid by the lessee at the end of the leasing contract.

  • Additional services included accompanying the leasing service

These are most commonly found in the full service operational leasing. Such may be the tire management, use of a substiture vehicle, servicing of the leasing vehicle and other such. To a certain extent the insurance services may also be regarded as “additional services”.

  • Monthly instalment and VAT

The last important requisite is the monthly installment of the leasing contract. Usually the monthly installments are annuity installments and remain the same for each moth of the leasing term. It is also possible that following the request of the lessee and if accepted by the leassor, the leasing installments may be “seasonal” (differing from season to season), “balloon” installments, etc. Each installment includes principle amortization, interest and VAT depending on the type of lese used.

As seen from the above, the requisites are quite a few and comparison between the offers of different leassors may be challenging, but the informed decision for choosing the best offer requires exactly this.

Another use of the leasing offer (further to finding the best prices and terms) is the possibility for evaluation given to the lessee for managing the financial obligations of the leasing contract. This analysis is even more important than finding the most competitive offer, as it gives the future lessee the possibility for assessment of her ability for meeting the future payment requirements, for matching the VAT treatment of the leasing with the tax policy of the lessee, for establishing an adequate residual value, etc. We will look into this analysis in greater detail in our next article “Taking the decision for leasing“.

  • Insurance offer

The insurance offer is generated by the future insurer of the transaction and is usually combined with the leasing offer, as usually the leasing companies have strategic partnerships with insurance companies.

The insurance included in the leasing contract is ofter regarded as the “necessary evil” without receiving the necessary attention. It is reasonable prior to taking the decision for leasing that the insurance cover receives its due attention – its price, the covered risks, the excluded risks and the specific requirements. Omission to make such an analysys usually results in noticing certain details upon th indemnity itself. Timely analysis of the insurance offer may reduce or mitigate the negative consequences of the insurance indemnity.

As the leasing asset is the main collateral to the leasing deal, it is rather logical that a requirement of almost all leasors is that the leasing asset needs to be adequately insured against all risks. Further, the leasors also require insurance cover of indemnities to third persons caused by the use of the asset. As an example, the leased car, while been driven by the lessee may kill a person in a road accident. Therefore leasors normally care that the car will have an active “third party liability” insurance.

Therefore, just as the lessee knows about the conditions under which the leased asset technical warrantee works, it it reasonable of her to know the requirements, the covered risks and limitations of the insurance of the asset.

Although the insurance is obligatory, most leasors will not mind the change of one insurance company to another, if the lessee so requests. Therefore it is reasonable that the lessee makes an inforemed decision in the choice of the insurance company – the biggest, with the best reputation, best indemnity settlement, etc.

Last but not least is the comparison of the price of the insurance – the “insurance premium” and the options for its deferred payment /in Bulgaria it is common to pay quarterly/.

The collection of all three offers may sometimes be a lengthy process. It is even harder to collect several alternative offers, aiming to compare prices and terms. Never the less this is an important step in the leasing procedure and if done right may dramatically increase the benefits of the leasing deal.