Difference Between Finance and Lease
The main difference between Finance and Lease is this - in Finance, customers pay off the product’s price by making monthly payments. If the customer fails to make payments, the lender can take the product away. In a Lease, customers have to pay a monthly rental fee to use the product, and the product owner can usually take the asset back after the lease term is over.
There are different ways to get high-value items, depending on your financial situation.
Financing is a way of buying something, like an expensive item, which you will have to pay back with regular payments. It is also known as ‘Hire Purchase Financing.’ Leasing is a way of borrowing where the leasing company will buy the item on your behalf. You will then have to pay a monthly rent amount for a fixed term, as agreed in the contract between you and the leasing company.
Example
Let’s take a look at a example and compare Lease and Finance options. Say we have a car that is worth $25,000. Now let’s reiterate - In the case of financing, you would have to pay the full cost of the car over time in equal transactions. Lease is different in a way that you have to pay the car’s value by the time the lease is up.
If the residual value of the vehicle is expected to be 60% in three years, the lessee will only have to pay off the remaining 40%. This would be $10,000. The lessee can then buy the asset once the lease period has been completed. The relevant calculations for the balance payment are made at that time.
Key Differences
Financing is when you buy something expensive, like cars or computers, and then you have to pay it back over time with monthly payments. Leasing is when someone else loans you something for a set period of time, like a few years. The commodity you borrow it for can be used as long as the contract says.
Usually monthly payments in Financing are higher that in Leasing. When you finance a purchase, you are actually paying for the whole thing, in leasing you are paying only for the part of the purchase that is being used.
With Financing you can only use the item you are aquiring. Leasing, on the other hand, allows the user to try a new commodity/version once the lease has expired.
Making repairs and maintaining an item is a responsibility of whoever is financing it. However, in the case of a lease, it depends on the type of lease. In case of a financial lease it’s the person who is leasing an item, and with the operating lease - the company who is leasing an item.