Difference Between Finance and Lease
The key difference between Finance and Lease is that in finance the customer pays off the price of the product by paying off monthly installments and if the customer fails then the lender takes away the product as the lender holds the lien on that product till payment of entire debts, whereas, in lease one has to pay monthly fixed rental for using the asset to the owner of such asset and asset is generally taken back by the owner after the expiration of lease term.
There are 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 and Lease parties.
We can consider an example of finance vs. 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.” 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’s expected worth is by the time the lease is done.
So, if the vehicle’s residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed. is expected to be 60% in three years, then are only required to pay off the remaining 40%, 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
- Financing is a process through which one purchases relatively high priced articles/commodities and is 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 purchaseHire PurchaseHire Purchase is a type of agreement in which the buyer of an asset chooses to pay for the asset in installments. A certain amount is paid as a down payment, and the rest is paid in installments that includes both principal and interest. payment consists of 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 for Financing usually is 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.
- The user must 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 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. 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 needed in case of leasing.
- If the asset is purchased with the help of the loan, the user can claim tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place. 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 wants 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 are the responsibility of the hirer in case of Financing. However, in case of a lease, it is the responsibility of lessee in case of financial lease and lessor in an operating lease.
Finance vs. Lease Comparative Table
|Basis of Comparison||Financing||Leasing|
|Meaning||One may either loan money/use the internal accruals.||Somebody else purchases articles and allows the customer to use it.|
|Ownership||The customer is the owner.||The 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 ExpenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.||Operating Expense|
|Duration||Shorter duration around 3-5 years||The longer duration can go as long as 10-15 years or more.|
|Depreciation||Hirer claims the depreciation.||LessorLessorA lessor is an individual who legally owns the asset granted on a lease (rented for a long tenure) to the lessee who pays a single lump sum amount or regular payments for using that asset. claims depreciation.|
|Examples||House, Land, Personal Car||Computers, Technological products, Commercial estate|
The selection of finance or lease as a mode of payment depends on the ability of the borrower and the end result of the commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units. for which either method is getting considered.
They are the aspects that 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.
Finance vs. Lease Video
This article has been a guide to finance vs. Lease. Here we discuss the top differences between finance and lease along with infographics and comparison table. You may also have a look at the following articles –