Financial Lease Vs Operational Lease: What's the Difference?
Leasing as mentioned earlier is gaining popularity and people are starting to look at leasing even as an investment option.
There are various kinds of leases that can be seen in an economic setup, however, the most common types of terminologies that you will come across when we say the lease, are financial leasing and operational leasing.
They can sound similar but they're not. Let's figure out 7 major differences between the two.
7 Differences Between Financial and Operating Lease
These are the 7 key differences between the two:
But before we start let's get the basics right...
Lessor - The person who owns the asset legally and leases the asset
Lessee - The person who hires the asset on lease
Difference1: Meaning
Financial Lease | Operating Lease |
| In a financial lease, the asset is legally owned by the lessor. He/she leases the asset to the lessee under certain legal circumstances. The lessee has a few economic rights over that asset. The lessor usually charges an amount from the lessee for leasing the asset. This usually happens over a long period of time. | In an operational lease, the lessor leases an asset to the lessee for a short period of time. However, the lessee has no economic rights on the asset whatsoever. Operating lease is becoming a chosen medium for investment in the current scenario. |
Difference 2: Ownership
Financial Lease | Operating Lease |
At the end of the term three things can happen:
| At the end of the lease period the ownership remains with the lessor. The lessee can continue to rent the asset or return it. |
Difference 3: Period of Contract
Financial Lease | Operating Lease |
| This kind of lease term is entered into during a long term contract. Hence it may not be sustainable for people who want to consider this as an investment option for a short period | This kind of lease term is entered into during a short term contract. Hence, the budding popularity |
Difference 4: Expense
Financial Lease | Operating Lease |
| All the costs regarding the asset, which includes insurance, maintenance, tax etc is overtaken by the lessee | The lessee simply pays the lease amounts, the rest is handled by the lessor |
Difference 5: Obsolescence
Financial Lease | Operating Lease |
| The power to obsolete the deal lies with the lessee | The power to obsolete the deal, lies with the lessee |
Difference 6: Taxation
Financial Lease | Operating Lease |
| The expenses incurred for the asset is liable for tax deduction | The rent which the lessee pays the lessor is liable for tax deduction |
Difference 7: Purchase and Cancellation
Financial Lease | Operating Lease |
| The purchasing and cancelling power lies with the lessee | The purchasing and cancelling power lies with the lessor |
Happy Leasing!
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