Question

In what way is leasing similar to borrowing to buy an asset?

Answer 1

A loan is money, property, or other material goods given to another party in exchange for future repayment of the loan value or principal amount, along with interest or finance charges.

The lease is a contract whereby one party, the lessor, grants the right to use a particular good for a period of time to the other party, the lessee (or tenant), which will pay for the transfer of the right to use a fixed amount regularly .

Leasing is similar to borrowing to buy in number of ways. Some of the ways are-

1) Collateral - In both leasing and borrowing for buying the assest, the primary collarteral is the Asset being purchased or leased.

2) Amount financed - In both leasing and borrowing, outside parties finance the cost of the asset. In borrowing, the lender and in leasing the lessor.The amount is payable to the lender in form of monthly installemnts.  Out-of-pocket costs are usually limited to the first month’s investment or installment.

3) Rates- In both leasing and borrowing, interest rates are decided in advance as per the contract or terms.

4)In both leasing and borrowing the right to use the asset is with the borrower/lessee.

5 ) Both the leasing and borrowing 2 parties enter into legally binding contracts.