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Lease Financing and Hire Purchase: Types Definition Operating (With Difference)

Hello, What are lease financing and rent purchase? Leasing has emerged during the recent few decades as a third important source of intermediate and long-term financing or corporate ventures. It is widely used for investment in Western countries. In India, leasing is a recent development, and equipment leasing was introduced in 1973 by First Leasing Company of India Limited. Let us throw some light on some small or big definition.

What is Lease Financing and Hire Purchase Definition?

Leasing is an arrangement that provides a firm with the use and control of the firm without purchasing and owning it. It is a form of renting property. A lease is a contract between the owner of the property (lessee) and the user of the asset called the lessee, whereby the lessee’s right to use the asset is called the rental of the lease for an agreed term for the duration of a lease.

The lease contract is regulated by the terms and conditions of the agreement. The lessee periodically pays the lease to the lessee in the form of regular fixed payments from time to time. At the end of the lease term, the asset is returned to the lessee who is the legal owner of the asset. However, in long-term lease contracts, the lessee is given the option to purchase or renew the lease.

It is divided into two leases. “1) Operating or Service Lease 2) Financial Lease” highlights the difference between these two.

Difference between Lease and Purchase

1. Operating or Service Lease

  • An operating lease is usually characterized by the following characteristics. What we have revealed.
  • It is a short term lease on a period to period basis. The lease period in such a contract is less than the useful life of the asset.
  • The lease is usually cancellable by short notice by the lessee
  • As the period of an operating lease is less than the useful life of the asset, it doesn’t necessarily amortize the original cost of the asset. The lessor has to make further leases or sell the asset to recover his cost of investment and the expected rate of return.
  • The Lessee usually has the option of renewing the lease after the expiry of lease period.
  • The lessor is generally responsible for maintenance, insurance, and taxes of the asset. He may also provide other services to the lessee.
  • As it is a short term cancellable lease, it implies a higher risk to the lessor, but higher lease rental to the Lessee.
  • It is common for the types of equipment that require technical staff for maintenance and are exposed to technological developments. E.g. computers, vehicles, data processing types of equipment, communication systems, etc.

2. Financial Lease.

A lease is classified as a financial lease. Or if it ensures the following. Amortization of the entire cost or investment and expected return on capital outlay during the term of the lease. Such a lease is usually for a long period and is non-cancellable. As a source of funds, financial leasing is an alternative option similar to debt financing.

A financial lease is a business for which a method of acquisition is used. Structured payment instruments over time. To give a proper definition, it can be expressed as an agreement. In which the owner receives a lease payment to cover the cost of ownership. Also, holds responsibility for low maintenance, taxes, and insurance.

  • The lessee (borrower or customer) selects an asset (equipment, software, and vehicle).
  • The lessee (finance company) buys that property.
  • The lessee uses that property during the lease.
  • The lessee pays a series of installments or rents to use the property.
  • The lessee charges a major portion or almost the entire cost of the property apart from earning interest from the rent paid by the lessee.
  • The lessee has the option of obtaining ownership of the property. (Dealing option purchase price or final rental payment)

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