Leasing Terms: Definitions
Finance terms and leasing terms explained

Advance Payment

Pay beforehand; up front.

Balloon Lease

Balloon leases or loans are those in which repayments are not made in a regular manner, but are made, as funds become available, in balloons.

Balloon Payment

A large sum repaid as an irregular instalment of a loan repayment.

Broker

An agent who brings two parties together, enabling them to enter into a contract to which he is not a principal. His remuneration consists of a brokerage, which is usually calculated as a percentage of the sum involved in the contract but may be fixed according to a tariff. Brokers are used because they have specialized knowledge of certain markets or to conceal the identity of a principal, in addition to introducing buyers to sellers.

Chattel Mortgage

All property of whatever kind, excluding freehold land and anything permanently affixed to freehold land. Interests in land (e.g. leaseholds) are chattels real. Chattels personal are all movable and tangible articles of property. Chattels include timber growing on land (whether freehold or leasehold) and articles of personal use.

Deposit

1. A sum of money paid by a buyer as part of the sale price of something in order to reserve it. Depending on the terms agreed, the deposit may or may not be returned if the sale is not completed.

2. A sum of money left with an organisation, such as a bank, for safekeeping or to earn interest or with a broker, dealer, etc., as a security to cover any trading losses incurred.

3. A sum of money paid as the first instalment on a hire-purchase agreement. It is usually paid when the buyer takes possession of the goods.

Depreciation

1. An amount charged to the profit and loss account of an organization to represent the wearing out or diminution in value of an asset. The amount charged is normally based on a percentage of the value of the asset as shown in the books; however, the way in which the percentage is used reflects different views of depreciation.
Straight-line depreciation allocates a given percentage of the cost of the asset each year, thus suggesting an even spread of the cost of the asset over its useful life. Reducing- (diminishing-)balance depreciation applies a constant percentage reduction first to the cost of the asset and subsequently to the cost as reduced by previous depreciations. In this way reducing amounts are charged periodically to the profit and loss account; by this method the depreciated value of the asset in the balance sheet may approximate more nearly to its true value, in that many assets depreciate more quickly early and more slowly later in their life. Thus depreciation is principally a means of allocating the cost of an asset over its useful life.

2. A fall in the value of a currency with a floating exchange rate relative to another. Depreciation can refer both to day-to-day movements and to long-term realignments in value. For currencies with a fixed exchange rate a devaluation or revaluation of currency is required to change the relative value.

Finance Broker

A broker who arranges finance. (See 'broker')

Hire Purchase

System of purchase by paying in instalments.

In Advance

Beforehand; in front.

In Arrears

Total unpaid debt, debts not paid by the due date

Interest

The charge made for borrowing a sum of money. The rate of interest is the charge made, expressed as a percentage of the total sum loaned, for a stated period of time (usually one year). Thus, a rate of interest of 15% per annum means that for every £100 borrowed for one year, the borrower has to pay a charge of £15, or a charge in proportion for longer or shorter periods.

In simple interest, the charge is calculated on the sum loaned only, thus I = Prt, where I is the interest, P is the principal sum, r is the rate of interest, and t is the period. In compound interest, the charge is calculated on the sum loaned plus any interest that has accrued in previous periods. In this case I = P [(1 + r) to the nth power – 1], where n is the number of periods for which interest is separately calculated. Thus, if £500 is loaned for 2 years at a rate of 12% per annum, compounded quarterly, the value of n will be 4 × 2 = 8 and the value of r will be 12/4 = 3%. Thus, I = 500 [(1.03) to the 8th power – 1] = £133.38, whereas on a simple-interest basis it would be only £120. In general, rates of interest depend on the money supply, the demand for loans, government policy, the risk of nonrepayment as assessed by the lender, and the period of the loan.

In economics, interest has two functions to perform: (i) to make the amount saved by households equal the amount that firms wish to borrow for investment; (ii) to make the amount of credit demanded equal the supply of credit. The rate of interest that achieves this equilibrium is known as the natural rate of interest. First defined by K. Wicksell (1851–1926), it implies that an actual interest rate below the natural rate will cause a rise in the prices of consumer goods, which will fuel inflation and lead to an inadequate rate of savings. The general theory of Maynard Keynes, built around Wicksell’s concepts, saw a role for governments in controlling credit by means of restricting the money supply.

Key Man Insurance

Insurance that covers the person on whom the operation and viability of a company (or activity) depend.

Lease Broker

Any broker who arranges a lease between a lender and a lessee. (See 'broker')

Lease Purchase

A variation on leasing, at the end of the lease period the goods become the lessee's property.

Lease Rental

See 'Leasing'.

Leasing

Hiring equipment, such as a car or a piece of machinery, to avoid the capital cost involved in owning it. In some companies it is advantageous to use capital for other purposes and to lease some equipment, paying for the hire out of income. The equipment is then an asset of the leasing company rather than the lessor. Sometimes a case can be made for leasing rather than purchasing, on the grounds that some equipment quickly becomes obsolete.

Lender

The person or institution who grants a loan.

Lessee

A person who is granted a lease; tenant.

Lessor

A person granting a lease; landlord

On Balance Sheet

Any financial expenditure that shows on a company's balance sheet.

Off Balance Sheet

Under the right circumstances, a lender (such as APT Finance) can arrange an "operating" lease which is essentially long term rent, not a "Cap-Ex" transaction, and so "off" balance sheet.

Operating Lease

Essentially long term rent, not a capital expense transaction.

Present value (PV)

The selling price at the time of sale i.e. now.

Refinancing

The process of repaying some or all of the loan capital of a firm by obtaining fresh loans, usually at a lower rate of interest.

Residual Value

The expected selling price of an asset at the end of its useful life.

Tax Allowances

Sums which are deducted from total income to arrive at taxable income.

Term

A specified period of time.