Difference Between Loan and Lease

Loan vs Lease
 

Loans and leases are popular methods used by individuals or corporations for the use and acquisition of equipment. Loans and leases are both offered by banks and financial corporations and whichever is used will depend on the equipment in question, purpose, convenience, tax benefits, etc. There are a number of differences between loans and leases. The article takes a closer look at these two terms, explains what is meant by a lease and a loan, and highlights how they are similar and different.

Lease

A lease is a legal document that defines the relationship between the asset owner (the lessor) and lessee. A lease agreement gives the lessee (the tenant who leases the property from the landlord who is called a lessor) the right to possession of the property for a specified period of time. A lessee will pay rent to the lessee for the use of the property. Leases are used in a number of instances such as when renting a house or leasing a car.

Leases can be for short term or long term; usually commercial leases are for longer term and apartment rents can be of shorter term, not more than a period of one year. A lessee will have greater rights and obligations and can use the property as they wish without damaging it. Since a lease agreement is set for a specific period of time, the landlord and tenant cannot terminate the tenancy as and when they wish. If they wish to terminate prior to the end of the period, they may have to pay some penalty to the other party.

Loan

A loan is when one party (called the lender, which is usually a bank or financial institution) agrees to give another party (called the borrower) a sum of money that is to be paid back after a certain period of time. The lender will charge the borrower an interest on the money that has been lent and will expect the interest payments to be made on a periodic (usually monthly) basis. At the end of the loan term, the full repayment of the principal and interest should be made. The terms of the loan should be set out in a loan contract which lays out the terms for repayment, interest rates and deadlines for payment.

Loans are taken out for a number of reasons such as to purchase vehicles, to pay college tuition, mortgages to purchase housing, personal loans etc. Lenders such as banks and financial institutions usually test the borrower’s credibility before lending funds. There are a number of criterion that should be met by the borrower; which include credit history, salary/income, assets, etc.

What is the difference between Lease and Loan?

Leases and loans are quite similar to one another as they are methods that are used by individuals or corporations, to use, and often acquire, equipment, vehicles, housing, or other benefits that they cannot immediately pay for in full. There are a number of differences between taking out a loan and a lease. A lease does not require a down payment and a lease only finances the value of the equipment up to the time of the lease term. A loan requires a down payment while the remaining amount is financed by the loan. In taking out a loan, the borrower is required to pledge other assets (other than the asset being financed) as collateral, but in a lease the asset that is being leased is considered collateral. The loan maybe at fixed or even floating interest rates, which can make predicting future payments a difficulty, whereas a lease normally has a fixed periodic payment. In a lease, the lessee may be able to claim the entire lease amount as a tax deduction whereas, in a loan, a portion of the loan payment can be claimed as a tax deduction for interest and depreciation. If the lease is an operating lease, the assets are shown as expenses and do not appear on the balance sheet, whereas loans assets are recorded as assets, and loan amount is recorded as a liability on the balance sheet which may affect financial ratio calculation.

Summary:

Lease vs Loan

• Leases and loans are quite similar to one another as they are methods that are used by individuals or corporations, to use, and often acquire, equipment, vehicles, housing, or other benefits that they cannot immediately pay for in full.

• A lease is a legal document that defines the relationship between the lessor and lessee and gives the lessee the right to possession of the property for a specified period of time and for which a lessee will pay rent.

• A loan is when one party (called the lender, which is usually a bank or financial institution) agrees to give another party (called the borrower) a sum of money that is to be paid back after a certain period of time.

• A lease does not require a down payment and only finances the value of the equipment up to the time of the lease term, whereas a loan requires a down payment and the remaining amount is financed by the loan.

• The borrower of a loan is required to pledge other assets (other than the asset being financed) as collateral but, in a lease, the asset that is being leased is considered collateral.

• The loan may be given at fixed or even floating interest rates, whereas a lease normally has a fixed periodic payment.

• In a lease, the lessee may be able to claim the entire lease amount as a tax deduction whereas, in a loan, a portion of the loan payment can be claimed as a tax deduction for interest and depreciation.

• In an operating lease, the assets are shown as expenses and do not appear on the balance sheet whereas, in loans, assets are recorded as assets, and loan amount is recorded as a liability on the balance sheet which may affect financial ratio calculation.