Leasing Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The consideration for the lease is called rent. A lease, by legal definition, is considered to be a contract that allows the use or occupation of property for a specific period of time, with a specified amount of rent. Different types of lease: Finance lease: A financing lease is a lease where you basically finance the purchase of an asset which you may or may not own at the end of the lease period. Operating lease: An operating lease is a lease where you never actually take "ownership" of the asset, but have limited use of it for a specific period of time. Difference between an Operating and a Finance Lease he main difference between a Finance Lease and an Operating Lease is that the rentals in the primary period do not substantially cover all of the capital cost of the asset and the interest charges of the finance. Advantages of lease financing: It offers fixed rate financing; you pay at the same rate monthly. Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate. You do not need to make large cash payments for the purchase of needed equipment. Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it. There is typically an option to buy equipment at end of lease term. Disadvantages of lease financing: Leases may not be terminated before the original term is completed. Therefore, the renter is responsible for paying off the lease. You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly. Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Tax implications also need to be compared between leasing and purchasing equipment.
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