Types of Lease 🆚
Leases are broadly classified into two types based on risk and reward.
1. Financial Lease (Capital Lease) 💰
Nature: It is like a Loan in disguise.
- Long Term: Covers almost the entire economic life of the asset.
- Non-Cancellable: Lessee cannot cancel the lease midway. Must pay all rentals.
- Amortization: The rentals cover the full cost of asset + interest + profit for Lessor.
- Maintenance: Lessee bears cost of repairs/insurance.
- Risk: Obsolescence risk is with Lessee.
Example: Leasing a factory machine for 10 years (Life of machine = 10 years).
2. Operating Lease 🛠️
Nature: It is like a Rental Agreement.
- Short Term: Much shorter than asset life.
- Cancellable: Lessee can cancel with notice.
- No Amortization: Rentals do not cover full cost. Lessor leases it to multiple people one after another.
- Maintenance: Lessor bears repairs/insurance.
- Risk: Obsolescence risk is with Lessor.
Example: Renting a car for 2 days, Renting a computer for 1 year.
Comparison Table 📊
| Feature | Financial Lease | Operating Lease |
|---|---|---|
| Duration | Long Term (Full life) | Short Term |
| Cancellable? | No | Yes |
| Maintenance | Lessee pays | Lessor pays |
| Risk of Obsolescence | Lessee | Lessor |
| Nature | Financing device | Service device |
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 4
1. Which lease covers the full economic life of the asset?
💡 Final Wisdom: "Financial Lease is for buying (financing). Operating Lease is for using (renting). Choose based on how long you need it!" ⏳
Next up: Leveraged Lease - Using other people's money! 🏗️