Difference Between Loan and Lease
Loan refers to the money borrowed by the individual or any other person (known as the borrower) from any financial institution or person (known as the lender), whereas, lease refers to the agreement where one party (known as the lessor) allows another party (known as the lessee) to use their asset by charging lease rentals in return.
What is Loan?
A loan is borrowing funds from any financial institute by an individual or an organization. When a company wants a source of funds, it either can approach the equity markets to raise equity or approach a financial institute for the requirement of a loan. Similarly, when an individual requires money to meet its need in terms of buying a property or buying a car or any other personal need, it approaches financial institutes for the requirement of loans.
For individuals, loans can be of many types like home, car loan, personal loan, etc. For providing loans, financial institutes will require collateral against which they will disburse the loan. Financial institutes will charge interest against loans provide to an entity. In terms of interest, loans can be broadly divided into fixed interest loans and floating interest loans.
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What is a Lease?
A lease is a contract where the lessor allows the lessee to use an asset for a specific period in return for a periodic payment. Based on the type of lease availed by the lessee for the asset, leases are classified into two, namely operating leases and finance leases. A finance lease is like buying an asset that is financed by debt.
Over the lease term, the lessee will recognize depreciation on the asset and interest expense on the liability. In contrast, an operating lease is like a rental agreement, where no asset or liability is reported in the balance sheet. The periodic lease payments are reported in the income statement as rental expenses.
Loan vs. Lease Infographics
Key Differences
- Different types of loans include personal loans, house loans, student loans, etc. A lease can be of two types, mainly finance lease, and operating lease.
- The interest on loans may be fixed or floating, and the rate of interest depends on it. But the rates of interest for lease are fixed in nature.
- In case of taking a loan, collateral is required by the financial institution against which the loan is disbursed. But in case of a lease, the asset which is taken by the lessee for lease acts as collateral.
- Loans can be taken by any individual or organization, whereas only businesses can take the lease.
- The entire documentation process for a loan is a lengthy affair, whereas the documentation process for lease is quite faster.
Loan vs. Lease Comparative Table
| Basis | Loan | Lease | ||
| Definition | A loan is borrowing funds from any financial institute by an individual or an organization. | A lease is a contract where the lessor allows the lessee to use an asset for a specific period in return for a periodic payment. | ||
| Types | Loans can be of various types depending on the need of the borrower. The different types of loans are home loans, car loans, personal loans, education loans, SME loans, etc. | Leases are of two types finance lease and operating lease, a finance lease is like buying of an asset that is financed by debt, and an operating lease is like a rental agreement where the lessee pays rent for the asset to the lessor. | ||
| Interest components | Interest on loans can be fixed or floating, wherein the case of floating rates, the rate of interest increases or decreases depending on the benchmark rates to which the floating rate is pegged. | In general, the rates for a lease are fixed in nature instead of otherwise stated. It helps companies to make expense forecasting and budgeting. | ||
| Collateral | Most of the loans require collateral against which they will disburse the loan. E.g., if someone requires an education loan, as collateral, they can provide their papers of property to the banks. | In case of a lease, the collateral is the asset only for which the lessee takes the operating or finance lease. | ||
| Loans seekers | Loans can be applied by organizations or individuals whoever needs funds to meet its requirement. | Only businesses avail the facility of lease whenever they have any requirement anything, which they do not want to buy uprights. Instead, they want to lessen it from the lessor. | ||
| Documentation | The process of documentation required is a bit lengthy and time taking in case of a loan as the loans are also taken by individuals. | In general, the process is faster as the lease is provided to a business for a specific need. |
Conclusion
Though the concept of the loan and lease is quite similar, there exists a difference between these two concepts. While the loan is that situation where an individual or a business borrows money from a financial institution lease refers to a contract between a lessor and lessee where the lessee uses the asset of the lessor for a specified time period but in return of periodic payments.
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