| Acceleration Clause
A stipulation in hire-purchase agreements that upon default in payment
of any one installment, the full outstanding balance of the price shall
immediately become due. The acceleration clause confers upon the owner
the right, while keeping the agreement alive, to recover from the defaulting
hirer the full unpaid balance of the hire-purchase price.
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Amortisation
This term is used in two senses:
(1) The repayment of Principal and Interest components of a Loan, over
a period of time.
(2) Write-off of an expenditure (like issue cost of shares, pre-incorporation
expenses) over a period of time.
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Back-loaded lease
A lease where the rentals are
higher towards the end of the lease tenure. This is also called 'rear-end
loaded lease'.
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Balloon lease
In this type of lease agreement
the rentals are low at the inception, higher during the middle period
and again low during the end.
The residual value in such lease contracts are usually very low.
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EMI
(EMI) Equated Monthly Installments
are installment towards repayment of a loan, lease or hire purchase agreement.
As banks and finance companies conduct very high volumes of retail business
it becomes easier for them to monitor and manage installments that are
constant in amount.
The EMI's are collected in advance as post dated cheques.
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Escalation Clause
A clause in lease agreements
which provides that the rentals shall increase on certain eventuality,
e.g., on increase in interest rate or on non-availibility of certain tax
benifits.
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Flat Rate of Interest
A method of calculating the interest
rate based on the total outflow of money. The method does not take into
consideration the time value of money and is thus a crude measure.
Flat rate of interest is the % paid in excess of the finance amount, and
is calculated on per year basis.
Working:
(1)Finance Amount = A
(2)Total Outflow = B
(3)Finance Tenure = C
Flat Rate (per annum) = ((B-A) / (A)*(C)) x 100
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Front-loaded lease
A lease agreement where the rental
payments are higher in the initial period, going down towards the end
of the tenure. Opposite of back-loaded lease (or rear-ended lease).
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Hire Purchase
Price
The total sum payable by the
hirer under a hire-purchase agreement in order to complete the purchase
of the goods to which the agreement relates. A total of cash-price
& financing charge.
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Hirer
The person who takes the goos on hire. If you purchase a car under hire-purchase
agreement with a finance company, then you become the hirer.
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Hypothecation
A hypothecation is an equitable
charge on the goods without possession, but not amounting to a mortgage.
The contract is done to secure a debt. Banks that give you a loan to purchase
a car, hypothecate the car in their name as security.
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Inception of a lease
The date of signing of the lease
agreement where the property to be leased has been constructed or has
been been acquired by the lessor. Where, on such date, the property to
be leased has not been constructed or acquired by the lessor, the date
on which such construction is completed or the property is acquired by
the lessor, shall be the date of inception.
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IRR(Internal Rate
of Return)
The internal rate of return of
a project is the discount rate which makes makes its net present value
equal to zero.
The IRR method is a popular discounted cash flow method, that takes into
account the time value of money and also considers the cash flow stream
in its entirety.
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Late Payment Charges
When the monthly installment
towards repayment of a loan is delayed the financier collects the installment
alongwith the late payment charges. The late payment charge is also known
as the delayed payment charges or the overdue payment charges.
The late payment charges are fixed at the time of signing the finance
contract.
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Lease Rental
In a purchase transaction, the
commodity (as a tangible form) is purchased for money while in a hiring
transaction the services of the commodity (intangible) are purchased.
Economic parlance therefore refers to the payment on hire interchangably
as 'rent', 'rental' or 'lease payment'.
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Lease Rate
The equivalent simple annual
interest rate implicit in the minimum lease rentals. This is not the same
as the interest rate implicit in a lease, which reflects the compounding
effect.
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Lease Term
The tenure or the period of the
lease agreement is known as lease term.
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Lessee
The user of the leased asset
is called the lessee. The lessor (finance company) is teh owner of the
asset.
Under the Motor Vehicles Act of 1930, the lessor was considered as the
owner of the vehicle and was subject to the liabilities of owner under
the act. Thus the lessor was liable for any criminal action or other offence,
even though the lease agreement shifted this burden to the lessee.
This position has been reversed under the Motor Vehicles Act, 1988. Although
the legal ownership vests in the lessor, the lessee is regarded as the
owner for all purposes under the Act.
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Lessor
Under the lease agreement, the
finance company who is the legal owner of the asset is known as the lessor.
The Motor Vehicles Act, 1988 - Section 51 contains special provisions
regarding motor vehicle subject to hire-purchase agreement, etc. In case
of vehicles financed under hire-purchase, lease or loan agreement, the
name of the lessor is mentioned as a financier.
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Lien
A lender's claim on assets offered
as security for a loan. It is a right which a person, to whom a sum of
money is owed by another, is given in law over the goods of that other',
to secure payment of the sum owed.
Lien may be possessory, i.e., exercisable only as long as
the goods are in the possession of the claimant, and equitable,
i.e., enforcable irrespective of the possession by the creditor.
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Margin Amount
Most financiers finance upto
90% of the cars value. The balance has to be paid as downpayment which
is also called the Margin Aomunt.
The resale values of cars differ and financier's fix up the extent of
finance and the margin amount based on their perception of security of
the asset.
Thus for smaller cars like the Maruti 800, Maruti Zen etc. the financiers
demand only 10% as margin amount. For premium cars that have lower resale
values, the financier hedge against future risk by collecting a bigger
margin amount of 20 - 30% of the cars cost.
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Minimum Payment
Clause
A clause in hire-purchase agreement
imposing a liability on the hirer to make a payment over and above the
arrears of hire-rent, in the event of the agreement or the hiring being
terminated before the property in the goods has been passed to the hirer.
The payment may be expressed to be for depreciation of goods or by way
of liquidated damages or compensation for loss of profit.
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NPV(Net Present
Value)
The value of cash flows discounted
using the time and risk value of money. It is the real value of a receipt
or payment in future, deflated because of interest. It is a method of
evaluating investment proposals.
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Operating lease
A short term cancellable lease
agreement which is not fully amortised. It is a lease, other than a finance
lease wherein the lessor seeks to recover his investment in a lease by
leasing the equipment to more than one lessee. For financial accounting
purposes, an operating lease is a lease which does not meet the criteria
for a capital lease or direct financing lease. Also, used generally to
describe a short-term lease whereby a user can acquire use of an asset
for a fraction of the useful life of the asset. The lessor may provide
services in connection with the lease such as maintenance, insurance and
payment of taxes.
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PDC(post dated cheque)
Most financiers collect post
dated cheques towards the repayment of the lease rentals or the installments
(EMI's) for a lease / hire-purchase / loan contract.
The post dated cheques not only provide convinience, but also protect
the financiers by making the issuer of the cheques liable to honour them
as per the Negotiable Instruments Act .
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Promissory Note
As a matter of precaution, the
lessee/hirer/borrower is required to execute an unconditional promissory
note in favour of the financier, for full amount of the installments /
rentals payable under theagreement. The promissory note is counter guaranteed
by the guarantor where applicable.
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Residual Value
The market value of equipment
prevailing at the end of the lease term.
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Security Deposit
Security Deposit is typical to
hire-purchase agreements offered by Non Banking Finance Companies.
The party seeking finance (hirer), is offered finance upto 100% of the
cars cost. The security deposit can vary from 15% to 35% as per the scheme
selected. The security deposit earns an interest of 14% simple or 14%
compounded quarterly, for the period of the agreement (tenure).
At the end of the tenure the security deposit is refunded along with the
interest earned through the tenure.
Unlike Fixed Deposits which can be terminated and refund sought before
maturity, the security deposit is linked to the car hire-purchase agreement
and is refunded only on termination of the hire-purchase agreement and
not in between.
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Termination Schedule
Leases sometimes contain provisions
permitting a lessee to terminate the lease during the lease term in the
event the leased equipment becomes redundant or obsolete to needs. The
liability of the lessee in the event of such termination is set forth
in a termination schedule which values the equipment at various points
during the lease term. If the equipment is sold at a price lower than
set forth in the schedule, the lessee pays the difference.
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