Buying vs Leasing

Updated on April 24, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Buying and Leasing

Buying refers to owning the right on an asset or property. On the other hand, leasing refers to the permission granted to entities for using an asset or property on behalf of the owners. Buying involves the transfer of title, while leasing entails offering the right to usage to another party without transferring the title. The terms buying and leasing signify an individual or entity’s possession rights over an asset.

Buying vs Leasing

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When people buy a product, they pay in full for it and enjoy ownership over it for the rest of their life until they transfer the title to someone else. On the contrary, when they take it on a leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more, they pay a rental amount to the owner regularly to exercise their usage right for a specific period.

Buying vs Leasing – Comparative Table

Let us have a quick look at the key differences between buying vs leasing:

ParameterBuyingLeasing
DefinitionInvolves title transfer for asset/product in questionInvolves no title transfer but only the right to use asset/product in question
Possession RightFull ownership of the property or assetRight to use the property or asset on the owner’s behalf
FlexibilityNo flexibility as the buyer becomes an accountable ownerFlexible as the ownership and accountability remain with the owner or lessor
BenefitsPay the full amount and get ownershipPay rental charges and keep using the asset until the lease tenure gets over
BeneficiariesMedium and big business ownersNew business owners who are still experimenting
Periodic PaymentNo – paid in a lump sumYes – paid in the form of periodic rental charges
Exchange ValueHugeLess
AccountabilityNew ownerOwner (in case of operating lease) Lessee (for finance lease)
TaxationThe full cost of the purchased asset can be deducted under Section 179 of the Internal Revenue CodeShow it as business expenses to get the tax benefits

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What Is Buying?

Buying is when an individual or entity purchases a product or the right to ownership for anything desired. The buyer has to pay the entire amount to the seller to transfer the title. Whether it is an automobile, a residential property, equipment, an industrial unit, or anything one wishes to own, the buying party can become an owner of anything at once as soon as the payment is made to the person or entity willing to sell the item.

Buying-vs-Leasing 1

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What Is Leasing?

Leasing is a process where individuals or entities can use a product for a specific period against a rental amount. While most people look for owning a product/asset, there are the ones who look for items or assets on rent to use until required. The owner of the product/asset is referred to as a lessorLessorA lessor is an individual or entity that leases out an asset such as land, house or machinery to another person or organization for a certain period.read more, while the one given the right to use it is known as the lesseeLesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more.

The property holder, in this case, is not willing to sell the title. Therefore, the only objective of the lessor behind providing items on rent is to have a significant periodic income. On the other hand, the lessee is comfortable paying a small amount in return for using the assets rather than paying a huge amount to own them.

  • When lessee leases a property, they agree to pay a rental amount regularly. As a result, they can exercise the right to use the asset or property in question.
  • At a considerably lower rate, individuals get an opportunity to use the asset or property as per their wish, as an owner with the title transfer does.
  • Both lessor and lessee sign a lease agreement depending on the clauses they consent to. Once the contract is signed, the latter receives the right to use the property/asset/product.

Types Of Leasing

The provision of leasing is available in two forms:

  • Finance lease (non-cancellable) – Under this kind of lease agreement, the risks and rewards associated with the property get transferred to the lessee, though the title remains with the lessor. In some cases, however, the owners are likely to sell it to the lessee if they wish to later on.
  • Operating lease – Under this form of leading, the accountability for the product rests on the owner’s shoulder and is not transferred to the lessee. After the lease tenure gets over, the property or asset is returned to the lessor.

Buying vs Leasing Infographics

Let us see the top differences between buying vs leasing.

Buying-vs-Leasing-infographics.jpg

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Buying vs Leasing – Example

Let us consider the buying vs leasing a car scenario below to distinguish between the possession rights:

Suppose Mary buys a used car from John, she pays the amount in full and becomes the legal owner. Therefore, if the vehicle shows any mechanical defect after the purchase, John will not be responsible for those. Instead, the new buyer, i.e., Mary, will be accountable for getting the repairs and other treatments done to ensure its smooth functioning.

On the contrary, as John is not willing to sell the car, he asks Mary to take it on rent and use it until she desires. Then, they sign an operating leaseOperating LeaseAn operating lease is a type of lease that allows one party (the lessee), to use an asset held by another party (the lessor) in exchange for rental payments that are less than the asset's economic rights for a particular period and without transferring any ownership rights at the end of the lease term.read more agreement to take the deal forward. While Mary uses the sedan for her purposes and pays the rental charges at regular intervals, any mechanical defect that might arise during the lease tenure will remain John’s responsibility.

Buying vs Leasing Video

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