What are the key differences between leasing and borrowing? Are they perfect substitutes? Please explain carefully...

What are the key differences between leasing and borrowing? Are they perfect substitutes? Please explain carefully the last questions about substitutes. thanks

Expert Solution

The key differences between leasing and borrowing is :

In a lease contract, there is a lessor and a lessee, the lessor allows the lessee to use a particular asset for a given period of time in return fro a recurring payment. At the end of the lease term, the lessee has to return the asset to the lessor as the lessor does not own the asset or the lessee will have purchase the asset from the lessor. There are 2 types of leases finance lease and operating lease. In case of a lease, the lessor cannot impose bankruptcy on the lessee in case there is a default. The lease payments are fully tax deductible
In the case of borrowing, the borrower lends money at a particular rate of interest which either has to be made annually, quarterly or semi-annually and is fixed. If your company has good income, a strong cash position, and comfortable borrowing capacity, a bank loan would be a good choice. If the borrower fails to repay the loan, the bank can take over the assets secured with bank of the company borrowing. whereas in the case of a borrowing, the borrower enjoys tax benefits for only the interest portion of the loan.

No, they are not perfect substitutes.

jeff jeffy answered 1 year ago

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