Nowadays, it is very difficult for an individual or entity, to buy an expensive asset in one go. In such a case, lease and finance are the two best courses of action, that allows a person to make use of the asset when they don’t have ample sum to pay the price. The lease contract is an arrangement, wherein the entity can use and control the asset without actually buying it. It is a type of renting asset.
On the other hand, finance is another alternative to buying the asset, in which the finance company pays the price for the asset on the firm’s behalf and then the firm repays the amount to the finance company, in monthly installments. Most of the people utter confusion regarding these two terms. So, carefully read the given article to know about the important differences between lease and finance.
Content: Lease Vs Finance
|Basis for Comparison
|Lease is a financial agreement in which one person buys the asset and allows the other to use it.
|Finance is an arrangement that allows you to buy the asset without paying the entire amount in a lump sum.
|To use the asset
|To own the asset
|Down payment plus Equated monthly installment
|Consist of the cost of using the asset
|Consist of principal plus interest
|At the end of the lease term, you have two options, either to buy it or return it to the lessor.
|Once all the dues are paid completely, you are the owner of the asset.
Definition of Lease
By the term lease, we mean a contractual arrangement whereby one party who can be an owner/ lessor/ leasing company buys the asset and grants the lessee the right to use the asset over the specified period, in exchange for periodical lease rental payments. The lease rental charges are paid as a consideration for the use of the asset, at short intervals. The charges amount to the income of the lessor.
Accounting Standard 19 issued by ICAI, deals with the lease. It can be operating or finance, single investor or leveraged lease, open end or close end, domestic or international. The duration of the lease can be long term or short term, as agreed by the parties concerned and the nature of a contract. The document in which the terms and conditions of the lease are specified is known as lease deed.
Definition of Finance
Financing is an arrangement whereby the financial institution finances money to buy the asset. It is a kind of loan agreement where you become indebted to the financial institution which financed you the asset, so you have to pay back the money in monthly installment. The total value of the asset financed is comparatively higher than the cash value of the asset because it includes the amount of interest along with the principal.
When you finance the asset, first of all, you need to make down payment which is a certain percent of the total value of the asset and the remaining amount is evenly spread over the specified period, in the form of Equated Monthly Installments (EMIs). In this option, you don’t need to pay the entire amount at a stretch; rather you defer the payments of the asset to a later date. When you pay off all the monthly payments, you became the rightful owner of the asset.
Key Difference Between Lease and Finance
The difference between lease and finance can be drawn clearly on the following grounds:
- A kind of financial agreement in which lessor purchases the asset and lets the lessee use it, for money consideration is called a lease. Finance means a kind of loan arrangement whereby you are allowed to buy and asset, and the financial institution pays money on behalf of you. In this way, the arrangement creates an indebted of the buyer towards the financial institution.
- Lease agreement allows you to use the asset. Finance allows you to own the asset.
- The consideration paid for the lease is known as lease rentals. Conversely, in finance, while buying the asset you need to pay the cash down, i.e. down payment and the remaining amount in equal monthly payments.
- The installment amount consists of the cost of using the asset. On the other hand, the installment amount consists of principal and interest.
- When an asset is leased, and the same asset is financed, the amount of monthly installment of the leased asset will be low as compared to the financed asset.
- At the end of the lease term, you have two options at lease, i.e. either to buy the asset or return it to the lessor. In the case of finance, once all the obligation is paid off, you became the owner of the asset.
When you want to purchase an asset but you do not have enough money to pay for it, you can go for lease and finance. The fundamental difference between these two is that lease finance is comparatively cheaper than the finance. So, if you have to make a choice amidst these two, you can go for the option that suits your budget and purchasing power.