The mystery of finance lease contract

Since the rent paid by the shipowner throughout the lease term usually covers all costs and reasonable profits of the lessor, the shorter the lease term, the amount of rent per period tends to be higher. On the contrary, the longer the lease period, the shipowner should pay the rent will tend to be lower.

The lessor's own financing is not back-to-back with the financial lease provided to the shipowner, and the risk borne by the lessor in its own financing arrangement cannot be directly transferred to the shipowner in the financial lease arrangement.

For example, the lessor's own financing usually adopts floating interest rate, while the rent in ship finance leasing is fixed. In other words, the lessor bears the risk of losses that may be caused by adverse changes in interest rate. Another example is that the shipowner is the owner of the ship throughout the whole charter period, so he bears the risk that the loss of the ship may bring losses to the shipowner.

Lessors usually respond to these risks, which is usually a certain amount of price compensation eventually reflected in the rent. The purpose of the lessor engaged in ship finance leasing is to pursue profit, so the profit level pursued by the lessor will directly affect the specific amount of rent in each period.

In most ship finance leasing arrangements, the owner usually pays the rent on a monthly basis and, like the time charter of the ship, the rent is usually paid in advance, i.e. before the owner begins to use the ship. While the monthly rental amount calculated in terms of the lessor's costs and profits is often not a whole number, the monthly rent paid by the shipowner is almost always a whole number.

The difference is usually adjusted through the final installment of the lease, so the amount of the final installment of the lease is generally larger than the previous amount, and is paid by the shipowner at the end of the lease term, somewhat similar to the end of the balloon payment in a ship loan. However, in practice, there are also ship finance leasing arrangements that stipulate that the shipowner should pay several periods of rent or an agreed amount before the lease begins.