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.
Example
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 instalments. 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% 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
Key Differences
- 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 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 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 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 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 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 | 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 | The longer duration 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 |
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.
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
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