A finance lease transfers the risk of ownership to the individual without transferring legal ownership. You choose a residual value within the ATO’s specified range to suit you, and at the end of your lease, you can pay it out, extend your term or enter into a new agreement. Operating lease on the other hand, is an asset funding option for businesses that don’t want to take on the risk of selling the vehicle at the end of the lease.
Because they are both a form of lease, they have one thing in common. That is, the owner of the equipment (the lessor) provides to the user (the lessee) the authority to use the equipment and then returns it at the end of a set period.
The differences between the two are clear if we look at who the ownership remains with, who deals with the running and maintenance costs, and whether or not the vehicle can be purchased at the end of the lease term.
Here we will look at both leases and why they are so different:
With a finance (capital) lease, the owner buys the vehicle and rents to the user who will have a purchase option at the end of the lease. The lessee will not face a high upfront cost as when purchasing the vehicle outright:
Think of an operating lease as a type of rental agreement. Because it has a shorter term, you are able to upgrade to a new vehicle regularly. You may even be able to do this whilst the lease is still in force. The difference between an operating lease and a finance lease is that the user will not be able to buy the vehicle during the period of the lease.
A finance lease is much more suitable to lease assets that will be used long-term, at the same time giving the user the rights of owner. The lessee does not have to face a huge capital outlay, as when purchasing the vehicle outright. Here, the rentals paid clear off most of the capital so taking ownership of the vehicle at the end of the agreement comes at an affordable cost.
With an operating lease, as they have shorter terms, the vehicle is far more likely to retain significant value at the end, therefore the rental amounts will be lower. Operating leases are more suitable for short-term use of vehicles, akin to renting. They do not normally involve any transfer of ownership.
If a finance lease or an operating lease sounds like it could be a solution for you or your business, find out more about the options available from here.
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