A contract in which one party (lessor) permits to use the asset for a specified period of time to another party (lessee) in exchange for periodic payments for a specified time is known as Leasing. At regular intervals, the lessee pays a sum to the lessor which is known as Lease Rents, as a consideration for using the asset owned by the lessor. There are two ways of leasing the asset, which are as under:
- Operating Lease: The lease which covers only a small part of the useful life of the asset is Operating Lease. In this kind of lease, there is no transfer of risk and rewards.
- Finance Lease: A lease agreement to finance the use of asset for the maximum part of its economic life is known as Finance Lease. The entire risk and rewards incidental to the ownership is transferred to the lessee with the transfer of the asset.
Key Differences Between Hiring and Leasing
The following are the differences between hire purchasing and leasing:
1. An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical installments, is known as Hiring. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.
2. Down Payment is must, in Hiring but not in Leasing.
3. The duration of leasing is longer than the hiring.
4. Leasing may cover asset like land and building, plant and machinery etc. Conversely, cars, trucks, tempos, vans, etc are the kind of assets which are sold on hire purchasing.
5. The installment paid in hiring includes principal amount and interest. In contrast to Leasing, in which the lessee has to pay the cost of using the asset only.
6. In hiring the ownership is transferred to the hirer only if he pays all the outstanding installments. On the other hand, in finance lease the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease there is no
such option available to the lessee