With the development of spheres of activity, it generates a variety of monetary resources necessary for conducting activities. This also affected the lending sector. Along with the traditional credit, such a source of replenishment as leasing has appeared on the market. Both banking products are used to temporarily meet the need for borrowed funds. So what is the difference between a loan and leasing?
Terms
Leasing is a contractual procedure in which a leasing company acquires property from a specific seller and transfers it to the client for temporary use. After the value of the asset and the lender's commission have been paid off, ownership of the asset can be transferred to the client. This clause must be spelled out in the contract. Regardless of whether the client buys out the property or not, the leasing company is responsible for the object during the entire term of the contract.
A loan is a loan that a bank provides for the purchase of a specific asset. Most often, the acquired property is a collateral for the transaction.
Let's consider in more detail what is similar, how does leasing differ from a loan? What is more profitable for businesses and individuals?
Common features
A loan, like leasing, is characterized by such criteria as urgency, repayment and repayment. In both cases, the loan is repaid by returning the funds to the lender. Money is provided for a specific period and for a certain fee. Debt repayment later than the specified period is a violation of the terms of the contract.
How leasing differs from a loan: in simple terms
It makes sense to compare both banking products only when buying an expensive asset, for example, a car, equipment or real estate. The very essence of leasing is that a bank or company acquires a certain asset at the request of a client, and then transfers it to the client for temporary use. Therefore, it makes no sense to consider leasing to replenish the working capital of the organization.
In general, the clients of leasing companies are more often organizations or individual entrepreneurs, rather than individuals. The need for this product arises when an entrepreneur wants to purchase expensive equipment, a vehicle or real estate, but he does not have enough of his own funds. Then he contacts a company that purchases this equipment, and then rents it out. The client undertakes to pay the value of the asset and interest to the company in stages.
The loan is more attractive to the consumer. The property immediately becomes the property of the client. You still have to repay the loan amount with interest, but for this the client has from 5 (car loan) to 30 years (mortgage). And the overpayment on the target loan will be less than on the lease.
How is leasing different from a loan for individuals? As in the case of lending to entrepreneurs, the main factor is the way the property is used. In the case of leasing, we are talking only about temporary use with the possibility of subsequent redemption of the asset. During periods of rising interest rates, the demand for leasing increases.
Individuals have the opportunity to purchase agricultural machinery, real estate, a vehicle, without overpaying large amounts to the lender. In times of crisis, the limits for the provision of borrowed funds in banks are understated.
Features for entrepreneurs
A bank loan can be used to replenish any fixed assets or working capital. Leasing can only be used as equity capital. Accordingly, the contract is drawn up for a medium or long term.
The asset purchased under the lease agreement is not reflected in the balance sheet of the company. All payments made under the agreement are not subject to income tax. These costs are borne by the running costs of the company. So saving on taxes is another advantage of leasing for entrepreneurs.
Leasing or credit: how is it different? What is more profitable?
The main difference between the two products is that the loan is always issued in the form of cash. While in leasing we are talking about the provision of property for temporary use. The property bought on credit is immediately reflected in the balance sheet of the organization, and the property transferred under leasing terms is only after the purchase from the lessor and provided that this clause is spelled out in the contract.
What is the difference between a loan and leasing? The advantage of leasing is that most often no collateral is required for its registration. In rare cases, the bank may ask for a small percentage of the transaction amount. The loan is provided against the security of the purchased or any other property. Moreover, its cost can be several times higher than the amount of the loan. This causes a lot of problems for representatives of small and medium-sized businesses.
For the lender, a lease agreement is more profitable. The tenant has more freedom of action in relation to the object of the transaction. Property maintenance costs can be included in the monthly fee. In the case of a loan, the client has to independently look for funds to pay for insurance, taxes and state duties.
Leasing types
It has already been said that the terms of the agreement may provide for the possibility of redemption of the asset. But leaseback can work according to a different scheme. For example, an entity sells a piece of equipment to a leasing company and then takes it back under a finance lease. The lessor pays an advance (approximately 30% of the cost) and monthly payments. At the end of the contract, the property again becomes the property of the organization.
The contract is usually concluded for up to 5 years. The amount of monthly payments depends on the cost of the equipment and its liquidity. The newer and more demanded the asset, the less money will have to be paid as a contribution.
Registration
What is the difference between a loan and leasing? It is much easier to sign a lease than to take out a loan. In the second case, the client needs to provide a whole package of documents, collateral and guarantees. The bank spends at least 2-3 weeks on a thorough study of all documents and credit history of the client. Only after this is the final decision on the granting of the loan made.
This is how a loan differs from leasing.
