Leasing
Financial Lease Vs Operational Lease: What's the Difference?

Leasing as mentioned earlier is gaining popularity and people are starting to look at leasing even as an investment option.

There are various kinds of leases that can be seen in an economic setup, however, the most common types of terminologies that you will come across when we say the lease, are financial leasing and operational leasing.

They can sound similar but they're not.  Let's figure out 7 major differences between the two.

7 Differences Between Financial and Operating Lease

These are the 7 key differences between the two:

But before we start let's get the basics right...

Lessor - The person who owns the asset legally and leases the asset

Lessee - The person who hires the asset on lease

Difference1: Meaning

Financial Lease

Operating Lease

In a financial lease, the asset is legally owned by the lessor. He/she leases the asset to the lessee under certain legal circumstances. The lessee has a few economic rights over that asset. The lessor usually charges an amount from the lessee for leasing the asset. This usually happens over a long period of time.In an operational lease, the lessor leases an asset to the lessee for a short period of time. However, the lessee has no economic rights on the asset whatsoever. Operating lease is becoming a chosen medium for investment in the current scenario.

Difference 2: Ownership

Financial Lease

Operating Lease

At the end of the term three things can happen:

  • The asset is returned to the lessor
  • The lease can be renewed
  • The lessee can sell it to a third party on behalf of the lessor
At the end of the lease period the ownership remains with the lessor. The lessee can continue to rent the asset or return it.

Difference 3: Period of Contract

Financial Lease

Operating Lease

This kind of lease term is entered into during a long term contract. Hence it may not be sustainable for people who want to consider this as an investment option for a short periodThis kind of lease term is entered into during a short term contract. Hence, the budding popularity

Difference 4: Expense

Financial Lease

Operating Lease

All the costs regarding the asset, which includes insurance, maintenance, tax etc is overtaken by the lesseeThe lessee simply pays the lease amounts, the rest is handled by the lessor

Difference 5: Obsolescence

Financial Lease

Operating Lease

The power to obsolete the deal lies with the lesseeThe power to obsolete the deal, lies with the lessee

Difference 6: Taxation

Financial Lease

Operating Lease

The expenses incurred for the asset is liable for tax deductionThe rent which the lessee pays the lessor is liable for tax deduction

Difference 7: Purchase and Cancellation

Financial Lease

Operating Lease

The purchasing and cancelling power lies with the lesseeThe purchasing and cancelling power lies with the lessor

Conclusion

As leasing emerges as a possible investment medium for the millennial, knowing these two categories will help you make a decision. If you want to know more about leasing and it's types, you can have a look at the video below.

Happy Leasing!

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