The primary ways to fund the purchase of an investment or assets are lease and financing. The object is the same to provide the hirer the right and procession to an asset. Both financing and leasing facility allows the owners to source valuable assets.
Do you know what reasons make lease different from finance? Let’s have look at the meaning, functionalities, importance, and difference between these two contractual agreements.
What Is Meant By Lease?
Leasing is a process in a legal binding contract in which one party holding the ownership of an asset accepts to let out the underlying asset to the lessee.
The written agreement includes the terms & conditions entailing the lease. In most cases, business equipment, machinery, vehicles, building, and property are leased to users.
Two parties are involved in this leasing agreement;
- Lessee (User of Asset)
- Lessor (Owner of Asset)
The legal owner of the asset is known as lessor whereby the lessee obtains the authority of the asset in exchange for rental payments. The name of both parties, specific lease assets, renewal dates, and insurance in case of loss are part of the agreement.
In contractual obligation, the party promises to use the property for a specific duration, payment submission schedule, and other terms of the lease. An operating lease, financial lease are the two major types of leasing.
What Is Meant By Finance?
Financing is also known as a capital lease that refers to the borrowing of money with the commitment of returning it after a certain time. This is normally obtained from the banks and financial institutes.
The borrower is required to pay the present value of money or interest rate at the time of returning capital. The party that takes finance is completely the owner of that money.
Practical Example of Leasing & Financing
Let’s consider an example leasing where a person A owns a house and he does not live in it due to personal reasons. He decides to lease it to person B. Person A would stay the legal owner of the house whereby person B would be obligated to pay decided rent worth of $500 per month for living in the house for 2 years.
The written agreement would include terms such as person B is not allowed to damage the house, what improvements he can do in residence, the payment dates, and end of agreement time, etc.
Now coming toward the example of finance in which Bank XYZ lends capital of $500 to a client ABC for the expanding of business. The bank will charge a certain interest rate from the client in the future. The lender pays some percentage of the present value of money for borrowing the capital.
How Lease and Finance Are Differentiated?
Several reasons make lease and finance distinct from each other;
- In leasing the lessee pays the rental amount whereas in finance a person borrows the money.
- The lessee is not the owner of the asset on the other hand finance taker is the owner of the borrowing asset.
- The lease is very affordable whereas financing has restricted affordability as the borrower is an equal purchaser of capital.
- The lessee can easily upgrade to new technology but the warranty in the finance method runs out quickly
- The asset owner may face risk if the lessee completes the life period of an asset.
- The lease is broken down into monthly rental payments and finance is broken down into the down payment or interest.
- There is a high-interest rate in the financing method. Considering the lease it has a very reasonable and affordable payment schedule.
Benefits of Taking Lease and Finance Facility
Leasing and financing are the most popular funding techniques that help people to resolve personal financial problems and provide support in expanding business activities. Taking vehicles, property, health equipment, and industrial machinery minimizes the monetary burden.
It is the best opportunity for people who don’t have enough capital to purchase the complete assets at once. The installment and monthly payments also give social and psychological advantages. It also keeps the economic wheel going in a smooth way due to money circulation.
It would not be wrong to say whether it is lease or finance both helps in personal or business growth. The utilization of financial assets provides security to users.
It is important to mention that both methods are beneficial for the users it depends on the circumstances or preferences of a person which makes one method better than others.