Asset Finance agreements can be based on Fixed or Variable Interest Rates.
Asset Finance agreements can be based on Fixed or Variable Interest Rates. A Fixed Rate agreement has the total repayments or hire charges fixed at outset, and will not vary as money market rates vary. This allows you to manage your cashflow effectively as you know in advance exactly when and how much you need to pay. A Variable Rate agreement has the interest or hire charges usually calculated as a percentage over a recognised base rate. The typical base rate used is Finance House Base Rate (FHBR), bank base or LIBOR. In some instances, Finance Houses may offer their own 'internal' managed rate in a similar vein to credit card companies.
Periodic instalments or rentals for a variable rate agreement are usually one of two forms. A periodic 'capital' payment is made with the interest or hire charges on the balance outstanding being paid separately, or an estimated 'capital & interest' payment is charged. In the latter case, as the underlying rate changes, the amount of interest or hire charges vary from the estimated amount. This difference is either resolved as a balancing charge/refund at the end of the agreement, or the length of the agreement will be increased/decreased.
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