Finance Leasing Manual - FLM6.43

Finance lessors: risks caused by uncertainty

Generally, finance lessors try to reduce uncertainty as much as possible. For example, they try to make sure that at any given point in the lease the kit will be worth more than they are owed, so they can be reasonably sure of getting their money. They also usually protect themselves against such things as future interest rate or tax rate or rule changes by making the lessee accept any consequential adjustments to the lease rentals which flow from changes to the lessor's 'net present value' computations. In return the lessee gets the cheapest terms possible but at the risk of paying more later.

If a finance lessor guaranteed fixed rentals throughout the lease it would have to cover itself against the tax or interest rate risks by building in larger margins. In the UK market the parties prefer to leave the interest and tax risks with the lessee. But some US-based groups trading in the UK may prefer to use the US system and pay more for certainty.