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Servicing the leasing contract

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Step 9 – Servicing the leasing contract

The obligations of servicing the leasing contract are both of the lessee and of the lessor, with those of the lessee being predominant.

The servicing of the leasing contract begins after the hand-over of the leasing asset to the lessee and ends upon the expiration of the leasing contract and the fulfillment of all obligations under it. We will look into the finalization of the leasing contract itself into another article due to its specifics.

Obligations of the lessee

The leasing contract is already functional and the lessee is in possession of the leasing asset. The “servicing of the leasing contract” begins.

  • Payment of installments

The main obligations of the lessee are connected with the timely payment of the leasing installments, as they are stipulated in the Repayment Plan of the leasing contract. The installments are usually monthly and of the same amount.

servicing the leasing contract - monthly leasing installments

The important thing here is that the obligation for payment of the lessee as well as the due dates for payment stem from the leasing contract and not from reminders for payment, invoices or other information which the lessor usually sends to the lessee. Or in short – the lessee is obliged to pay the leasing installment on the due date without waiting for reminders.

  • Payment of insurance premiums

As we mentioned in the article “Insurance” above, the leasing contract usually envisages the obligation of the lessee to maintain an active insurance coverage of the leasing asset. This obligation is linked with the payment of insurance premiums. The premium is paid annually, every six months or quarterly according to the insurance policy. Normally the lessee pays the premium to the lessor, who transfers it to the insurance company.

Depending on the type of the leasing asset it is possible that the lessee will need to organize some additional activities, linked with the insurance coverage, such as inspection of the leasing asset by representatives of the insurance company, installation of additional mechanisms against fire, theft, etc. The lessor usually reminds the lessee for the need to carry out these additional activities, by requesting documents proving that they have been done. At the same time, not without cause, we suggest that the lessee takes a more active role in ensuring of the insurance cover – after all, the lessee is responsible for all risks associated with the leasing asset.

leasing insurance

It is important to mention here that new obligations for payment of insurance premium arise in the second, third, and remaining years of the leasing term. In the initial leasing offers there is mention only of the insurance premiums due in the first year of the leasing term. The remaining ones are omitted. Very rarely there are leasing companies and respective insurance companies, who offer one insurance with a tenor of a few years (the term of the leasing contract). Normally the insurance policies are annual with insurance premiums paid either annually or quarterly.

Obligations of the Lessor

After the delivery of the leasing asset and the registration of ownership (if the asset stipulates such), the main obligations of the lessor are reduced to:

  • Regular invoicing on the due dates of each monthly installment,
  • Control of maintenance of the necessary insurance coverage and linked with this activities,
  • Administrative support to the lessee – support for service and maintenance of the leasing asset, annual technical checks, proxy letters for driving, etc.,
  • Support to the lessee for guaranty service of the leasing asset by the vendor,
  • Support to the lessee for booking and repairing damages to the leasing asset by the insurance company.

leasing service

Not included in the leasing contract, but still practiced by some leasing companies are reminders sent to the lessees for upcoming leasing payment obligations. This is usually done by SMS or e-mails sent automatically.

leasing service web system

In addition to the above, some leasing companies have very well developed web portals, where the lessee can find not only the latest invoice but also make a historic report, check all future payments as well as receive much additional administration services.

Obligations of the Insurance Company

Often insurance under a leasing contract is considered as the “necessary evil” or as an “additional financial burden”. If the above obligations are done formally and without the proper attention, it is possible to omit the obligations of the insurance company. The most frequent example of this is the renewal of a car insurance for the second or third year of the leasing, without repair of the small damages to the car incurred during the year (if not done in time, the insurance company will refuse the repairs). Therefore we urge the lessees to make the full use of all insurance cover when needed.

The obligations of the insurance company are to cover all the risks of the leasing asset, as they are described in the insurance policy. Although the maintenance in good repair of the leasing asset is in the interest of the lessor (he is the owner and that is his collateral) he usually does not have information for damages, especially the small such. Therefore the active party for making use of the obligations of the insurance company is the lessee, who will need to file the damages with the respective insurance company.

It is important to mention that upon expiration of a given insurance policy, the obligations of the insurance company under it are terminated. Advice to the lessees: do not waste time and be quick.

Service of the Leasing Asset

Under financial leasing and net operational leasing, the maintenance of the leasing asset is entrusted to the lessee. An example with leasing a car – the fuel, tires, lubricants, brake pads and others all become the obligation of the and the expense of the lessee. The only advice here is to take care and meet all due dates under the guaranty, which may link the maintenance of the car with the requirement to use specific auto repair shops.

The exception to the above rule is the full-service operational leasing. It is used exclusively for leasing cars. Under this type of leasing, the lessor undertakes the much of the obligations for maintenance of the leasing asset and other supporting services, such as:

  • Booking of claims for guaranty service;
  • Administration support – annual technical check, vignette, road tax, etc;
  • Insurance cover – making the insurance and the additional administration;
  • Tire management – change and wardrobe;
  • Lubricant management, filters, and other car-fluids;
  • Changes of consumables – brake pads, disks, etc;
  • Booking and repair of insurance indemnities;
  • Replacement car for use by the lessee when the original leased car is being repaired;
  • Fuel management;
  • Other services.

In this case, the obligations of the lessor are considerable. The expenses for them are included in the monthly leasing installments. The lessors themselves, seldom execute these obligations on their own. It is much more common to use sub-contractors, with the leasing company only coordinating the timely and efficient execution of each obligation and the expenses paid.

We need to mention that on the Bulgarian market fuel management is still not offered as an additional service by the lessor. Therefore we may anticipate this to occur in the coming years.

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