Finance vs Lease

Finance vs Lease Differences

• Financing vs Leasing is 2 options for procuring high-value articles depending on the financial liquidity available. Financing is a process whereby one will buy the relatively high priced articles and is expected to pay back in the form of monthly payments. It is also known as ‘Hire Purchase Financing’.
• Leasing is considered a process of borrowing whereby the leasing firm will purchase on behalf of the customer. Finance or Lease are then allowed to use the product/commodity against a monthly rent amount for a fixed term as agreed upon in the contract entered by Finance vs Lease the parties.

Finance vs Lease Examples

We can consider an example of Finance vs Lease for clarity. Say if a car is costing $25,000, then in case of financing, one has to pay the amount fully or in equal installments. However, in the case of a lease, one is required to pay only what the car is expected to be worth by the time the lease is done. So, if the vehicle’s residual value is expected to be 60 percent in three years, then are only required to pay off the remaining 40 percent, which in this case would be $10,000. The lessee can purchase the asset once the lease period has been completed and relevant calculations for the balance payment are made.

Finance vs Lease Infographics

Here we provide you with the top 7 differences between Financing vs Leasing

 

Finance vs Lease Key Differences

The key differences between Financing vs Leasing are as follows –

Financing is a process through which one purchases relatively high priced articles/commodities and expected to pay back the same through monthly payments. The commodities are generally Cars, Computers, Machinery and Houses. On the other hand, leasing is a borrowing process in which the leasing firm buys instead of the individual, permitting to be used for a fixed timeline which is for a few years. The commodity is available to use for the timeline until the contract expires.

Hire purchase payment consists principal amount and effective interest for the duration of the agreement whereas leasing involves rental payments which are computed as the cost of asset utilization.

The monthly payment with respect to Financing is normally higher as compared to Leasing since in Financing one pays for the entire cost of the commodity. Leasing involves paying only for the portion which is getting used up.

It is mandatory for the user to purchase the asset once he has the finances ready. In the case of leasing, the lessee uses the asset for the lease period and makes rental payments. The lessee has the option of buying the asset at the end of the lease period.

Financing requires borrowers to pledge the existing assets as primary/collateral security but no security is required in case of leasing.

If the asset is purchased with the help of the loan, the user can claim tax benefits on the interest on loan payments and also depreciation of the asset whereas, in case of lease financing, the user can claim only lease rentals which are uniform during the lease period.

Financing will restrict the user to use only the respective commodity which Finance or Lease want to acquire. Leasing will allow the user to try a new commodity/version once the lease has expired. Say, if the lease of one car is over, the user can take a new car/version on the lease.

Repairs and Maintenance is the responsibility of the hirer in case of financing but in lease its responsibility of the lessee in case of the financial lease but lessor in operating lease.

Financing vs Leasing Head to Head Differences

Now, let’s look at the head to head differences between Finance vs Lease

Basis of Comparison	Financing	Leasing
Meaning	One may either loan money/use the internal accruals	Somebody else purchases article and allows the customer to use it.
Ownership	Customer is the owner	Dealer/Leasing firm is the owner of the product/commodity
Down Payment	A portion of the amount can be paid to reduce monthly payments.	No significant down payments
Type of Expenditure	Capital Expenditure	Operating Expense
Duration	Shorter duration around 3-5 years	Longer duration which can go as long as 10-15 years or more.
Depreciation	Hirer claims the depreciation	Lessor claims depreciation.
Examples	House, Land, Personal Car	Computers, Technological products, Commercial estate

Finance vs Lease – Final Thoughts

The selection of Finance or Lease as a mode of payment depends on the ability of the borrower and the end result of the commodity for which either mode is getting considered.

Financing vs Leasing are the aspects have to be considered before arriving at a decision and one should keep in mind the pros and cons as well. In either case, there is no thumb rule for a specific method to be adopted and the idea can be different from one individual to another.

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