Leasing companies offer a way for businesses and individuals to use assets without buying them outright. Some examples of assets that are offered by leasing companies include vehicles, construction equipment and office equipment. According to the U.S. Small Business Administration, 85 percent of all companies in the U.S. lease equipment, and 89 percent of these companies intend to lease more equipment in the future.
Types of Leasing
With all leases, the company offering a lease retains ownership of the asset being borrowed. However, there are several different types of leasing. The first is called a "direct lease." With a direct lease, the leasing company purchases an asset and offers it to the lessee. The lessee is able to use the asset for a prearranged amount of time, as long as the monthly lease payments are made. The second type of leasing is called "leaseback." With this kind of lease, the lessee already owns the asset. Instead of buying a new asset from an outside source, the leasing company purchases the asset from the lessee and leases it back to the original owner for a monthly fee.
Leasing Terms
Leasing companies offer different terms to different customers. These terms include the length of the lease, the required monthly payment and the permitted usage of the asset. Often, the length of the lease and the monthly payment are linked: Longer lease terms come with lower monthly payments, while short terms require higher monthly payments. Leasing companies often limit the type or amount of usage that is allowed. With vehicles, for instance, it is common for leasing companies to set mileage limits. If the lessee uses the asset in a way that violates the lease terms, additional fees may be charged.
Ending a Lease
Several options are typically offered by leasing companies when the term of a lease expires. If the lessee does not need to use the asset for more time, the item is simply returned. If the lessee still requires the asset, however, the lease can usually be renewed or extended. Many leasing companies also offer the lessee a chance to purchase the asset once the term has ended. If the lessee decides to buy the item at the end of a lease, they own it completely and no further monthly payments are required.
Advantages and Disadvantages
There are both advantages and disadvantages to leasing companies. Leasing companies allow lessees to increase their cash flow, and eliminate the need for users to pay large amounts of cash upfront. Leasing companies also allow lessees to use items without incurring debt. Because a lease is usually classified as an expense and not as a debt, lessees are able to keep their credit high. However, using a leasing company is typically more expensive over the long term than purchasing assets up front. Additionally, lessees do not have full legal ownership of the item being leased, and must be careful to follow the terms of the lease.
References
- Duport: How Does Leasing Work
- LeaseGuide: Basics of Leasing
- Quality Leasing: Leasing Overview
- Beacon Funding: Leasing Statistics
- Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 12, 2020.
- Merriam-Webster. "Lease." Accessed April 12, 2020.
- AARP. "To Buy or Not To Buy." Accessed April 12, 2020.
- Consumer Financial Protection Bureau. "What is a Manufacturer Suggested Retail Price (MSRP)?" Accessed April 12, 2020.
- LeaseGuide.com. "Capitalized Cost – Cap Cost." Accessed April 12, 2020.
- Autotrader. "Leasing a Car: Can You Negotiate the Price?" Accessed April 12, 2020.
- Edmunds. "The 'Residual Value' of Leasing." Accessed April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: Future Value." Accessed April 12, 2020.
- LeaseGuide.com. "Money Factor—Explained." Accessed April 12, 2020.
- Federal Trade Commission. "Financing or Leasing a Car." April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: End-of-Lease Costs: Closed-End Leases." Accessed April 12, 2020.
Writer Bio
Benjamin Aries has been involved in digital media for much of his life and began writing professionally in 2009. He has lived in several different states and countries, and currently writes while exploring different parts of the world. Aries specializes in technical subjects. He attended Florida State University.