Leasing - Comparison of Buying and Leasing

Comparison of Buying and Leasing

There are many distinct differences between buying and leasing, regardless if such a transaction or agreement applies to property, machinery, equipment or other assets.

The difference lies in that a lease is conceptually very similar to the principle of “borrowing.” The ownership of the leased property (be it land, equipment, merchandise, or etc.) is not transferred under the terms of the lease agreement. The lease gives the lessee the right to use the assets covered under the agreement for the duration of the contracted term, however, upon the completion of said term the lessee is required to return the assets in question to the lessor, thereby completing the terms of the agreement. In a general example having to do with an automobile lease, the vehicle is due back to the dealership at the conclusion of the lease term. Once the vehicle is returned, the automobile lease agreement is completed and the parties (lessor and lessee) separate with no further obligations to each other (assuming there is no damage on the vehicle entitling the dealer to some further compensation). The lessee has no further claim or right to use the vehicle and the lessor, or car dealer no longer collects any payment from the former lessee – the previous driver.

Many lease agreements contain clauses and addendums that outline additional rights, or options for the lessee, to be exercised at will upon the conclusion of the lease (there are numerous equipment lease types with individual features). In automobile leases as a general example, a lessee may have an option to purchase the vehicle, thereby restructuring the agreement and ultimately obtain the ownership of the asset previously leased. In the example of a property lease, the renter (or lessee) may have the option to extend the lease, under pre-determined terms. Such scenarios are numerous and are typically pre-set during the initial creation and negotiation of the agreement between the parties.

Purchasing, on the other hand, involves an agreement that outlines the terms under which the purchaser acquires ownership of the desired item, property or asset. The purchase agreement delineates the purchase price and the terms under which it is to be paid for by the buyer. The overall purchase price can be amortized over a period of time as in the case of financing, or it can be paid in full, resulting in the instant transfer of ownership to the purchaser. In the event that the purchase is financed over a period of time, the ultimate price paid for the item or asset can be greater than the original price due to interest. For an individual deciding between buying or leasing, it is crucial to understand the pros and cons of each.

• Responsibility: In a scenario involving business entities that typically rely on functional equipment for ongoing operations and to stay ahead of competitors, responsibility is a key factor. In a purchase, the responsibility for the equipment falls solely on the shoulders of the business owner. While there are various insurance plans and warranties available to protect the owners, in case of damage or faulty manufacturing, the ultimate responsibility for the life of the equipment, after a purchase is complete, falls on the buyer. In a lease scenario, a lessee is only responsible for the equipment for the duration of the lease and while he or she remains in possession.
• Resale value: In case of a purchase, the full value of the asset is transferred to the purchaser, as the new owner. This means that in case of resale at a subsequent time, the full price for which the asset is resold can be collected by the new owner. In case of an automobile purchase, for example, an individual can, at a later date freely resell the vehicle and collect its value, albeit a depreciated amount from the original purchase price. In a lease, the lessor has no claim to the asset upon the conclusion of a lease, thereby the monies that were paid in the course of the lease cannot be, in part or in whole be recouped through a resale of the asset.
• Depreciation: Depreciation is a major consideration for individuals deciding between buying and leasing. For assets that suffer from significant depreciation, either as a result of regular wear and tear or through becoming obsolete upon the release of newer versions of the same materials (particularly applicable in the case of technology) leasing can prevent a significant loss of value. In business, there exists a basic rule of thumb: “If it appreciates, buy it. If it depreciates, lease it.” Leasing could permit the use of the equipment while it is new and upon the completion of the lease, it can be simple to upgrade by virtue of a new lease. In case of a purchase, however, an individual may be “stuck” with an obsolete asset with no means of recouping the cost of its acquisition.
• Maintenance: Because in the instance of a lease the ultimate ownership is retained by the lessor, it is in the lessor’s best interest to maintain the asset in its best working order. Therefore, lessees can often benefit from comprehensive maintenance programs offered by lessors while still paying a discounted premium due to the fact that the asset is being leased, not purchased.
• Cost: In the event of a purchase, the full value of the asset must be paid to the seller. In the event of a lease, however, only a portion of the full value is assessed, typically around 50%, however the figure varies based on the duration and type of lease. As a consequence, a lessor can gain the use of a much needed asset for a fraction of the full price of ownership. In many instances, this can better serve the lessee that an outright purchase would. As a corollary, a lessor could be granted the use of an asset that could otherwise be cost prohibitive.