Asset finance: the hidden trapsby Grace Kneafsey
Many people will be surprised to learn that, in the world of commercial finance, there is a lack of regulation to ensure transparent and fair marketing. Unlike consumer finance, there is often no requirement to display a clear, all-inclusive interest rate and typically, there is a lack of transparency on extra costs.
Here's our top four traps to watch out for:
A MISLEADING INTEREST RATE
Not all interest rates are created equal. You should always ask to see the APR. Why? Two reasons. Firstly, an APR rate considers the timing of your repayments and secondly, an APR rate includes all fees and charges.
‘BAKED IN’ CHARGES AND FEES
The financial services industry is notorious for extra charges and fees. Specifically, we would highlight the importance of identifying costs relating to:
- Brokerage commission if you are using a finance broker – this can be as much as 10% of the equipment cost;
- Early termination or prepayment fees;
- Secondary lease fees – this is important if you wish to continue using the asset at termination of the primary lease; and
- Fees around late payments and admin fees relating to changing payment plan.
EXPENSIVE BREAK CLAUSES
Most small and medium enterprises thrive on flexibility and, on occasion, may wish to terminate a finance lease early or delay a purchase under a HP agreement. It's important that you fully assess the costs in this scenario.
Insurance against accidental damage, theft or fire is often mandatory with high value equipment finance. This, of course, makes sense because the funder needs to protect their asset while on lease. Nonetheless, it's important to ensure you are always receiving a fair insurance quote. Many funders and brokers capture a huge portion of the premium as sales commission and this can be avoided if you arrange your own insurance.
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