Question

Compare and contrast two types of leases and describe the advantages and disadvantages of each. Which type of lease would produce the lowest risk?

Answer 1

Finance lease is a type of an agreement in which ownership of the property will be transferred to the lessee at the end of the lease term and the risk and reward will be significantly transferred.

Operating lease is a type of another lease agreement in which the ownership of the property is retained during and after the lease term by the lesser of the property and there is an ownership will not get transferred to the Lessee.

Advantages of operating lease are that there will be capital funds which are having no connection with the asset and there are higher degree of tax advantages because rentals are tax deductible in nature, so the administrative cost of running car fleet are borne by the lessor and assets are not fluid in nature, so it will help in lowering the cost.

Disadvantages of operating lease is related to the non transfer of the ownership of the Asset and hence they will need to return the Asset to the lessorr and they will have to enter into new lease at a different rate so it can lead to to non ownership of asset.

Advantages of financial lease will be related to lower initial cost investment which will be required as well as it will be conserving the total capital of the company and assisting in the corporate growth by taking Assets on the lease and it will also help the company to let the equipment pay for itself and lower the monthly payment.

Disadvantages of financial lease is related to to negative impact on the credit rating of the business as well as the agreement will be secured against the Asset so as it will be repossessed in case of non payment and there is another risk associated with the legal ownership of the asset and you will not own it.