Financial Lease Vs. Operational Lease: What's The Difference?

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Grip Invest
Grip Invest
Published on
May 13, 2022
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    Difference between financial lease and operational lease

    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:

    • The asset is returned to the lessor
    • The lease can be renewed
    • The lessee can sell it to a third party on behalf of the lessor
    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 periodThis 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 lesseeThe 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 lesseeThe 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 deductionThe rent which the lessee pays the lessor is liable for tax deduction
    Financial Lease Vs Operational Lease-1
    • Difference 7: Purchase And Cancellation

    Financial Lease

    Operating Lease

    The purchasing and cancelling power lies with the lesseeThe purchasing and cancelling power lies with the lessor

    Conclusion

    As leasing emerges as a possible investment medium for the millennial, knowing these two categories will help you make a decision. If you want to know more about leasing and its types, you can have a look at the video below.

    Happy Leasing!


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    Leasing
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    Grip Invest
    Grip Invest
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