Finance and operating leases – two very different types of leases, but both can give you access to the things you need. On the surface, they both sound like great options, but there are some key differences between them. So, if you’re looking to lease a car, a computer, or just about anything else, you’ll want to make sure you understand the differences between finance and operating leases. Ready to take a deep dive? Let’s go!
1. What is a Finance Lease?
A finance lease is an agreement between a lessor, who owns an asset, and a lessee, who is looking to use the asset for a specific period of time. It is a form of long-term rental that gives the lessee the right to use the asset in exchange for regular payments over the leasing period. The lessee typically has the option to purchase the asset at the end of the lease, although this is not always the case. One of the key differences between a finance lease and an operating lease is that the lessee is typically responsible for the maintenance and upkeep of the asset during the leasing period.
2. What is an Operating Lease?
An operating lease is a rental agreement between a lessor and a lessee. In this type of agreement, the lessor retains ownership of the asset and the lessee pays periodic rental payments for the use of the asset. The lessee has the right to use the asset for the duration of the lease term and may have the option to extend the lease or purchase the asset at the end of the term. Unlike a finance lease, the lessee does not have the option of acquiring ownership at the end of the agreement, so it is considered a more cost-effective option for short-term use.
3. Benefits of Each Lease
When it comes to the benefits of a finance lease, the biggest advantage is that you can use the asset while making payments over time. This means that you have access to the asset right away and don’t have to wait until you have saved up the full amount required to purchase it. On the other hand, the main benefit of an operating lease is that you don’t have to worry about the asset’s residual value at the end of the lease term. With an operating lease, you simply return the asset to the lessor and don’t have to worry about selling it or otherwise dealing with the asset’s value.
