Everything about car leasing

by Baber K. Khan - October 31, 2010

Leasing has now become a household name. From cell phones to airplanes everything is up for lease. But the SOPs for all are  different. I am confining myself to vehicles’ leasing and shall be
discussing various angles of the lease from customer’s point of view.

In order to lease or finance a vehicle, there are certain parameters that one needs to fulfill before he/she can qualify for the product. However, some leasing companies and banks condone the major
requirements and charge a higher mark up rate, as a quid pro quo arrangement. SBP and SECP act as regulatory authorities and  relevant Prudential Regulations have to be complied with by the leasing institutions. Those who condone or violate the regulations can
attract wrath from the regulatory bodies anytime.

I am now reproducing major areas of concern that the lessee and bank look into before & after sanctioning/approving the deal.

– You are between 22 and 55 years of  age. Although some banks condone the bracket.

– Eligibility criteria entails that your take home salary to be at least times of your monthly installment. Salary slip or certificate is required as proof, reflecting regular/monthly income stream; e.g Salary 0,000/- Installment should be 0,000 or less.

– If you are a self-employed person, proof of monthly income is required.

– Bank Statement for last 6 months to 1 year is required as a proof that you have stakes in the society and are a regular contributor to the economy of Pakistan and that your bank will share your whereabouts when you default and disappear.

– Your DATACHECK is clear that means you have not defaulted previously on any sort of loan obtained from a financial institution or your total exposure is not bursting the cap limit.

– You are a resident Pakistani. These schemes are not for  nonresident Pakistanis.

If you fulfill the above, do some basic research and self questioning.

– What sort of car you require?
– What shall be the equity (your contribution) amount?
– What would be the tenure?
– How shall you repay?

ISLAMIC (IJARA) OR CONVENTIONAL:

Taking a broader view, there is hardly any difference between the two. The difference is in terms of terminology and nomenclature. In Islamic leasing, the installments and insurance start after the delivery of vehicle, so this is a relief. However, the installments (called rentals) inflate because the deferred period amount is spread upon the remaining installments. Takaful (Islamic  insurance) was not available till March 2006 . But now the first Takaful Company (sponsored by Pak Kuwait Investment Company) has become functional and the Islamic Banks have started offering Islamic Mode of Insurance.

LEASING OR FINANCING:

In leasing the asset is booked and registered in the name of the bank or leasing company and in case of financing, it is booked and registered in lessee’s name with a HPA (Hire purchase agreement clause). In financing, when you terminate the lease, since the asset
is already in your name, the registration authorities merely delete the HPA clause and you remain the first owner and no fee has to be paid. In case of leasing the car is transferred in your name and you
have to pay transfer fee, becoming the second owner. If you are a businessman, while preparing your books of accounts (for income tax purposes) you don’t have to show the car as your asset because
it is leased one and the owner is the bank. This holds true for leasing not for financing. See what suits your needs and requirements.

DATACHECK/CIB Report.

When you will fill in the application form, your particulars are sent to a privately established company DATACHECK Pvt Limited for obtaining your credit stature. Some data is also sent to Credit Information Bureau at SBP. This is done by 80% of the banks and leasing companies. In case of default, banks get negative report. Record of all loans obtained, all credit cards’ limits, all running finance facilities, all auto finance, house finance, commercial finance and other liabilities are reflected in the Datacheck, including the latest one applied, irrespective of the fact whether you avail it or not. So be careful while submitting the applications because all data goes into your personal record. Do not apply in various banks
at one time because your personal datacheck will not give true picture and might pose problems for you in future. At some stage, NADRA and CBR will be involved and all this data will go to your
personal databank. Request the bank to provide you a copy of your Datacheck for your record.

APPLICATION FORM:

State your personal information as correct and accurate as possible. Chose the payback period that best suits your budget. The longer the term, the lesser the installment amount, but in the end you would be paying at least 25% more than a shorter-term lease. Short- term lease is preferred. Get an amortization chart based on your preferences. This is a blue print of all the financial calculations.
Keep it safe.

After submitting the application form, a verification officer who, with or without your knowledge, would verify the facts you mentioned about your home, salary package, credit card limits and references. Any wrong information will lead to submission of  negative report by the verifying officer or the outsourced firm hired for this purpose. Get a file and have all documents photocopied
and keep the same for your record. You would require some of them at some later stage. Tell your references to expect a call from the bank. Also inform the HR department, if you are a salaried  person, that if some bank or leasing company inquiries about your salary status, inform them accordingly. Pay the processing fee
to the bank through cheque (for record purposes): non-refundable.

POST APPROVAL PROCESS:

Once your loan is approved, you will require to sign, 0- 0 pages document book and some other legal documents including an affidavit that in case of your death, the bank shall have the right to
repossess the vehicle. You might have to sign an open transfer letter in favor of the bank. If you are not maintaining your account with the same bank, you might be required to give post-dated cheques, equal to the total number of installments. Some banks may ask you to deposit the cheque or cash on monthly basis, depending upon bank’s requirements.

PLACING THE ORDER:

If everything is in order, approval of documents and issuance of Pay order usually takes – days. By this time bank or the leasing  company shall remain in constant touch with you to give you a care-banking attitude. Once approval takes place, they would  hardly notice your existence. Try to remain involved in the whole process by inquiring the stages completed, avoiding their irritation. Also, at the time of placing the order, make sure your name,  address, NTN, car variant, color and the delivery period are all correct. At a later stage it would be difficult to make corrections, especially in the invoice and sales tax certificate or color option. Get photocopies of the Pay Order that the bank gives to the authorized dealer and the provisional booking order for your record and keep
in the file you prepared for the purpose.

INSURANCE:

Ask the bank to call the insurance guy at the show room to take snaps of the car. There are types of insurances, straight line and depreciating value. Discuss with the bank. You won’t be given a choice because that the bank’s prerogative. Get a copy of the insurance policy, irrespective it is registered or not. Keep it in the file you made. Get a copy of the certificate of insurance and keep it with you. If the bank gives you the option of choosing an insurance company, chose the best. You would be paying the first year  insurance upfront along with processing fee.

Openly discuss the possibilities of theft or total loss after each completed year of lease and the amount that you shall get in each scenario. It would be much less than your expectations. Therefore, opt for the best combination. Also discuss the concept of “market value and sum assured, whichever is less”, with the bank. Knowledge of these concepts will help you in coping with later-on
developments of insurance. Also discuss the workshops and replacement of parts policy of the Insurance company. Check out the name of the surveyor and if possible, have a chat with him. He will reveal all the facts about all the insurance companies, good or bad, provided you take him into confidence. It would be an education.

TAKAFUL:

Islamic Insurance is in development stage therefore most of the concepts have been borrowed from the conventional insurance. However, the good point in Islamic insurance is that it is charged
when the car is delivered not when it is ordered by the bank. The rates are the same 4 to 6%.

INTEREST RATES:

Check out the IRR (Internal Rate of Return) and the flat rate. Also are they fixed or floating. Apply the MS Excel formula to see the results. Perhaps when one is going for a lease 1 or 2% interest rate is not that important, it’s the way things are handled.

TRANSFER OF OWNERSHIP:

Submit an application to the concerned ETO requesting  removal/deletion of HPA clause, if it’s a financed car. Attach original registration documents. In case of leasing, and if you intend to transfer it in your name, fill in the T-1 form and transfer letter. Deposit the requisite fee on Challan 32-A at NBP or SBP counters.
You will get the car documents back in a month’s time. Now you can sell the car any time you want.

TRANSFER OF LEASE:

A leased car cannot be transferred from one person to another, under any circumstances. Those who do this on judicial stamp papers have no legal standing or binding. This can be an unofficial
arrangement. Banks or leasing companies are not responsible in any
case.

DEFAULT:

While one or two late payments do not ring alarm bells to the banks, it’s or more, especially when the lessee’s whereabouts are not known. At this stage the bank’s Receivable Management team is activated. If, after hectic efforts, the lessee remains untraceable, an FIR is lodged, duplicate key is obtained and car is repossessed, if possible. Otherwise, based on FIR, a criminal case is registered
under relevant sections of CrPc (Criminal Procedure) Act of Pakistan. Known references and relatives are hounded by recovery team and police.

LEASING IMPORTED/SECOND HAND CARS:

Like re-financing this is also a specialized field. Not all banks indulge in this. After evaluation, the fair market value of the car is assessed, irrespective of your declared value. All import related documents are required including B/L, invoice and customs papers. Rest of the
procedure is same.

CONCLUSION:

Before selecting a bank or leasing company, make sure you meet some responsible & relevant person of the company to answer the above basic questions. The runner, who assists you in filling the application form, might not know all the policies of the bank
therefore do not rely on him or take his advice very seriously. Always seek a second opinion. The best bank would be which is flexible and has user friendly policies. There are lots of hidden costs.
You have to weigh them before making the decision. Go for the bank which lays down several options for you instead of just one. Likewise, check out from mates and relatives their experiences
about banks. If you follow the above regimen, there is hardly any chance of getting befooled. Yes, our interest rates are increasing every day but then is not everything going up? Why should leasing
remain behind?

Baber K. Khan

My words have 1420 horsepower and are louder than your Civic's muffler.