Lease Finance

Posted in Finance, Accounting and Economics Terms, Total Reads: 1466

Definition: Lease Finance

When one party Buys/Owns the Asset and the other (Borrower) controls, operates and uses it. The party which owns the asset is called Lessor and the party which borrows is called Lessee. Lessor receives a regular and fixed lease rental on its asset over a fixed time period called life span of lease. Life span of lease is can be from few moths to several years.

One of the advantages of lease financing is that they can be shown off the balance sheet and are not counted as liabilities despite being one.

Another argument from the borrowers is that it is less risky than investing own amount of large money in expensive fixed assets that suffer from seasonality.

 Also, monthly payment of lease rental are viewed as required operating expenses, thus these expenses give a business or individual significant tax benefits by boosting the expenses in the financial statements.

Example: Cost of Leased Asset = $40,000

                        Lease Term = 5 Years

                        Quarterly Rental = $2440

                        Residual Value = $0.0

                        Interest Rate = 2.20%


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