Operating & Finance Lease Benefits

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:

Finance lease

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:

  • They will be responsible for all risks, just as if they owned the asset and the vehicle will be shown on the balance sheet.
  • The lessor retains ownership but the lessee has exclusive use in line with the terms of the agreement.
  • Rental payments are made by the user during the lease period, with a balloon payment at the end if preferred.
  • The term of the agreement is normally for the useful lifespan of the asset.
  • At the end of the lease, the customer can pay the balloon payment and keep the vehicle.
 

Operating lease

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.

  • The user has access to the vehicle for a set time period in return for making regular monthly payments.
  • The customer is able to use the vehicle for the full term of the agreement, paying rental sums each month.These payments are not equal to the full value of the vehicle, as with a finance lease.
  • Risks remain with the lessor with the plan being for the vehicle to be returned to them at the end of the term.
  • At the end of the agreement, the vehicle is expected to maintain a residual value, which is forecast at the beginning of the lease.
  • Vehicle maintenance may be built into the payments.
  • Ownership remains with the lessor and at the end of the agreement, the vehicle can be returned or a new lease taken out.
  • As of 2019 in Australia,companies must now list all operating leases on the balance sheet.

So which should you choose – a finance or operating lease?

Much depends upon your situation and you may wish to ask yourself the following questions:

  • Do you want to keep the vehicle for a long time or is your preference to up-grade on a regular basis?
  • Are you happy about taking care of all maintenance costs?
  • Is your intention to use the vehicle for most of its life?

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.

 

Disclaimer 

The information provided by Toyota Fleet Management, a division of Toyota Finance Australia Limited ABN 48 002 435 181, AFSL and Australian Credit Licence 392536, is of a general nature and for your information only. Nothing in this article constitutes or should be considered to constitute legal, taxation or financial advice. Before making a decision about any product or service described, we recommend that you seek independent professional advice such as from your accountant, taxation or financial adviser or lawyer, who can advise you about your personal circumstances and what would be suitable for you.

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