Finance vs Lease

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Difference Between Finance and Lease

The key difference between Finance and Lease is that in finance, the customer pays off the product’s price by paying off monthly installments. 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 the 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.

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Example

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.”read more for clarity.

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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.read more 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 Video Explanation

Finance vs Lease Infographics

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Key Differences

Finance vs. Lease Comparative Table

Basis of ComparisonFinancingLeasing
MeaningOne may either loan money/use the internal accruals.Somebody else purchases articles and allows the customer to use it.
OwnershipThe customer is the owner.The dealer/Leasing firm is the owner of the product/commodity.
Down PaymentA portion of the amount can be paid to reduce monthly payments.No significant down payments
Type of ExpenditureCapital 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.read moreOperating Expense
DurationShorter duration around 3-5 yearsThe longer duration can go as long as 10-15 years or more.
DepreciationHirer claims the depreciationHirer Claims The DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more.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 claims depreciation.
ExamplesHouse, Land, Personal CarComputers, Technological products, Commercial estate

Final Thoughts

The selection of finance or lease as a payment mode depends on the borrower’s ability and the 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.read more for which either method is getting considered.

They are the aspects that must be considered before arriving at a decision, and one should also keep in mind the pros and cons. 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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