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 marketsEquity MarketsAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more 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 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 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 leasesOperating LeasesAn operating lease is a type of lease that allows one party (the lessee), to use an asset held by another party (the lessor) in exchange for rental payments that are less than the asset's economic rights for a particular period and without transferring any ownership rights at the end of the lease term.read more 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 assetDepreciation On The AssetDepreciation 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 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 sheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. The periodic lease paymentsLease PaymentsLease payments are the payments where the lessee under the lease agreement has to pay monthly fixed rental for using the asset to the lessor. The ownership of such an asset is generally taken back by the owner after the lease term expiration.read more are reported in the income statement as rental expenses.
Loan vs. Lease Infographics
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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 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. read more 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 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 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 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. |
| 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 leaseRates For A LeaseThe lease rate is the interest rate associated with leasing the asset during the lease period. In simple terms, it is the compensating amount that otherwise the lender would have earned if the same property, equipment, or vehicle would have been up for some other use.read more are fixed in nature instead of otherwise stated. It helps companies to make expense forecasting and budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more. |
| 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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