Lease financing is understood as a famous medium- and long-term financing option. In which the owner of an asset grants another person the right to utilise the asset in exchange for a periodic payment. Usually, the asset’s owner is generally called a lessor, and the user is popularly known as the lessee.
Typically, a contract is usually made between the lessor as well as the lessee regarding the terms as well as the conditions of the lease. Post the lease period, the asset goes back to the lessor, which is the owner. A Statista Consumer Insights survey conducted from July 2023 to June 2024 showed that in India, a majority of people, even in the bottom 50 percent of the household income bracket, live in their own houses.
There can also be a provision in the contract regarding the obligation to buy the asset by the lessee, which is the user, after the lease period is over. Another alternative for financing options such as Quick Personal Loans can be used to purchase or invest in assets outright.
Types of lease financing
The two kinds of lease financing are understood as the following:
- Operating Lease: It is understood as a short-term lease arrangement where the lessee rents an asset from the lessor for a specified period of payment without the intention of owning it at the end of the lease term. The predominant features of an operating lease are ownership, lease term, maintenance and repairs, and renting office equipment.
- Financial Lease: A financial lease, also popularly called a capital lease, is understood as a long-term lease arrangement where the lessee uses the asset for most of its useful life and may eventually gain ownership or a purchase option. The main features of a financial lease include ownership, lease term, and responsibility on the balance sheet.
Advantages of Lease Financing
There are various benefits of lease financing. Some of them are included as the following:
- Improved flexibility: A lease offers the flexibility to upgrade assets.
- Tax benefits: lease financing offers tax deductions. It also assists in tax advantages.
However, there is a recent survey done by the International Financial Corporation (IFC) depicting the depreciation rates for most common-use assets in India, which range between 15% and 20% on the declining balances method. As a result, most lease transactions do not result in a significant tax advantage to the lessor.
- Reduced cost maintenance: it lowers the cost of repairs along with various repairments.
- No large initial outlay: it is ideal for companies with limited cash reserves.
- Credit requirements: it is an easier approval process compared to conventional loans.
- Capital conservation: lease financing assists in preserving capital flow along with liquidity.
Applications for Lease Financing
There are various domains in which lease financing is highly applicable. It is understood as the following:
- Industries utilizing lease financing
- Small businesses and startups: leasing offers crucial capital for early-stage business ventures.
- Large corporation: lease financing is particularly taken as a tool for asset management and optimisation.
- Individuals: possible uses in personal contexts as well as in other kinds of financing, including Quick Personal loans.
Difference between lease financing and quick personal loan
If you are an amateur like most, you must know that there are certain situations wherein you must choose between lease financing and a quick personal loan. These can be understood as the following:
- Lease Financing for Business Assets: When one wants financing for business assets, it is considered the most appropriate option.
- Quick Personal Loan for Individual Needs: As for individual needs and requirements, quick personal loans are generally preferred.
- Comparative Benefits: You must also go in depth about various aspects including speed and flexibility.
Conclusion
In a nutshell, lease financing allows businesses or individuals to utilise assets without buying them. The lessee makes periodic payments to the lessor, gaining asset access while avoiding large upfront costs.