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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.
Various kinds of leases 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 and operational.
They can sound similar, but they're not. Let's figure out 7 major differences between the two.
7 Differences Between Financial And Operating Leases
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.,areis overtaken by the lessee | The lessee etc., pays the lease amounts; the lessor handles the rest |
- 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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Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/.
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