What is Leasing?
Leasing is a financial arrangement where an individual or business rents an asset, such as equipment or machinery, from a lessor for a specified period in exchange for regular payments. Unlike hire purchasing, where ownership transfers to the purchaser at the end of the payment term, in leasing, the lessor retains ownership throughout the lease period. However, the lessee benefits from the use of the asset without bearing the full cost of ownership. At the end of the lease term, the lessee typically has options, including purchasing the asset at its residual value, returning it to the lessor, or renewing the lease. Leasing offers flexibility, allowing businesses to access necessary assets without a significant upfront investment, and it may include services such as maintenance and insurance, depending on the terms of the lease agreement.
The working of Leasing is as follows:
- Selection of Asset: The lessee selects the asset they wish to use from the lessor. This could include equipment, machinery, vehicles, real estate, or other tangible assets.
- Negotiation of Lease Terms: The lessor and lessee negotiate the terms of the lease agreement, including the lease duration, rental payments, and any additional terms or conditions.
- Periodic Rental Payments: The lessee makes periodic rental payments to the lessor for the use of the asset. These payments are typically made monthly or quarterly and are determined based on factors, such as the value of the asset, the lease duration, and any associated costs or fees.
- Use of the Asset: The lessee has the right to use the asset for the duration of the lease term, subject to the terms and conditions outlined in the lease agreement.
- Maintenance and Insurance: Depending on the terms of the lease agreement, the lessee may be responsible for maintaining and insuring the leased asset during the lease term.
- End of Lease Options: At the end of the lease term, the lessee typically has three options:
- Renew the Lease: The lessee may have the option to renew the lease for an additional period, subject to negotiation with the lessor.
- Return the Asset: The lessee can return the asset to the lessor at the end of the lease term.
- Purchase the Asset: In some lease agreements, the lessee may have the option to purchase the asset from the lessor at a predetermined price, often referred to as the residual value.
Difference between Hire Purchasing and Leasing
Hire Purchasing and Leasing are both methods of acquiring assets without the need for an upfront purchase. However, they differ in terms of ownership, payment structure, and the transfer of risk. Hire Purchasing involves acquiring an asset through a series of installment payments over a specified period; whereas, Leasing involves renting an asset from the owner (lessor) for a specified period in exchange for periodic payments.