Explained: Advantages and Disadvantages of Lease Finance

The lessor is the property or asset owner who rents it out, receiving payments for its use. On the other hand, the lessee is the party paying to use the property or asset under agreed terms. In leasing an asset, the lessor has several advantages. Similarly, the lessee who takes an asset like a vehicle or machinery on rent also has several advantages.

Advantage To lessor:

By leasing out his asset the lessor gets assured regular income in the form of rent.

Although the possession of the asset is with the lessee, the lessor still owns the asset and on termination of the leasing contract, he gets back his asset or sells it to the lessee.

The lessor can claim all the specified tax deductions and benefits associated with leasing. Because the lessor owns the asset, the lessor receives a tax benefit in the form of depreciation on the leased asset.  

Leasing is a highly profitable business because the rate of return on lease rentals is much higher than the interest paid on the asset’s financing.

Leasing is a highly profitable business. Growing demand for construction machinery, transport equipment and trucks, commercial and non-commercial vehicles, plant and machinery, medical devices, and TMT (technology, media, and telecom) applications around the world has had a direct impact on the high growth potentiality of Financial Leasing.

Disadvantages to lessor:

In the event of inflation, the cost of the asset goes up but the lessor cannot increase the rent beyond the agreed amount in the contract. So leasing is unprofitable to the lessor in Case of Inflation.

 Double taxation: Sales tax may be charged twice: First, at the time of purchase of the asset, and second, at the time of leasing the asset. 

Sometimes, the lessee may use the leased asset carelessly and there is a great chance that the asset cannot be useable after the expiry of the primary period of the lease. 

Advantages to lessee:

When the lessee has decided to acquire some machinery or equipment, he or she approaches the lessor to arrange the finance for the purchase. The lessee will not have to spend a lot of money to acquire an asset and he can utilize the money for working capital.

The lease payment made by the lessee is considered business expenses and the business can claim tax deduction on expenses.

Generally, leasing is a source of financing which is cheaper than almost all other sources of financing 

Lessee gets some sort of technical support from the lessor in respect of leased assets. 

Leasing is inflation-friendly to the lessee,  the lessee has to pay a fixed amount of rentals each year even if the cost of the asset goes up. 

 After the expiry of the primary lease period, the lessee may purchase the assets by paying a very small sum of money. 

Disadvantage to lessee

A finance lease is non-cancellable and the lessee is compulsorily required to pay rent irrespective of whether he is using or not using the asset taken on the lease.

 The lessee will not become the owner of the asset at the end of the lease agreement unless he decides to purchase it. 

Lease financing is more costly than other sources of finance because the lessee has to pay lease rental as well as expenses incidental to the ownership of the asset. 

As the asset taken on lease is not owned by the lessee such an asset cannot be shown in the balance sheet which leads to an understatement of lessee’s asset.

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