Lease Finance vs. Installment Sale

There are various options available in a business to finance its assets. It may be an operating lease, financial lease or installment sale and a host of others. However, in making decisions, the financial and accounting implications should be taken into account.

Leasing is a practice which allows a person to use the asset for an agreed period of time against payment of lease rentals. At the end of the term, the lessor can sell the asset to a lessee or terminate/extend the agreement as per mutual consent.

Majorly, there are two types of lease transactions:

Financial Lease

This type of lease is long-term in nature and is continued till the economic life of the asset. The cumulative lease rental payments throughout the contract are greater than the initial cost of the asset. Examples are: Taking a building or factory on a lease.

Operating Lease

This type of lease is short-term in nature and is generally for a specific period which is much less than the economic life of the asset. The total lease rentals during the leased period do not exceed the cost of the leased asset. Hiring a car, for instance, is an example of operating lease.

Lease Finance vs Installment SaleAn installment sale is one of the finance facilities to buy vehicles or other assets in exchange for a specified series of payments. The ownership transfers at the end of the credit agreement. It may or may not include interest. It carries certain tax advantages i.e.

It can be used for all types of properties, except:

  1. Securities traded in exchange markets.
  2. Property for sale in the ordinary course.

Lease Finance Vs Installment Sale

Nature: Installment sale is a sale whereas lease financing is a type of rental contract with a purchase option between the two parties.

Ownership of the Asset

In an installment sale, the ownership transfers to the user at the end of the installment period. Whereas in a case of lease financing, the lessee has to transfer the asset to the lessor after the end of the lease period and the lessee has an option to purchase or not to purchase the asset.

Tax Benefits

The total deduction for taxation purpose is same for leasing and installment sale. However, in the case of leasing, it takes twice as long to write off the asset as compared to an installment sale. The depreciation is claimed by the lessor in lease financing whereas, in an installment sale, the user claims the depreciation.

Balance Sheet Appearance

In lease financing, the value of the asset is not included in the financial statements since the lessee is not the owner. Whereas in the case of installment sale, the installments are capitalized i.e.  the asset appears on the asset side of the balance sheet and a corresponding liability against such asset appears on the liability side.

Overall Cost of the Asset

The cost of the asset in case of lease financing is the cost of using the asset over its life. In the case of installment sale, installment includes the principal amount and the interest for the term till the last installment is paid.


Generally, leasing is suitable for longer periods and for assets like land, property, heavy vehicles and huge plant and machinery. An installment sale is done for short periods and for assets like light moving vehicles, electrical items, small machinery etc.

Maintenance Support of the Asset

In the case of operating lease financing, the repairs, and maintenance of the asset is borne by the lessor and in the case of the financial lease, it is borne by the lessee. In an installment sale, the responsibility lies with the user.

Reduced Initial Cash Outlay

Since there is no immediate purchase of an asset in an installment sale, the cash flow is limited up to the margin money i.e. the down payment or the deposit as it is so called in addition to the periodic installments. In the case of lease financing, the monthly rentals are the only cash flows during the entire usage life of the asset.

It is, therefore, necessary to know the consequences while dealing with lease transactions and installment sales. The person should analyze the options with a different outlook. The economic viability of the transactions along with the entries in financial statements shall be according to the specified acts and rules. Also, the income tax consequences, as well as the VAT consequences, should not be overlooked.

Last updated on : August 31st, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Transferable Letter Of Credit
  • Credit Risk
    Credit Risk
  • Lease Agreement and its Content
    Lease Agreement and its Content
  • Difference between Lease Financing Vs. Hire Purchase
    Difference between Lease Financing Vs. Hire Purchase
  • Receivables / Invoice Factoring
    Receivables / Invoice Factoring
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    tod loanindirect expenses examplesadvantages and disadvantages of cvp analysisbep meaningdebt to asset ratio analysis interpretationbest capital budgeting methodworking capital turnover formulacapital lease vs operating lease accountingconversion price convertible bonddtr cash loansus gaap impairment testcompute debt ratiohow to calculate payback period formulaaccounting knowledge in hindiifrs asset impairmentwhat is decoupling inventorywacc meaningcalculating dividend payoutnon cumulative preference sharesquick ratio formula examplehow do you calculate debtor dayshow to calculate irr with different cash flowscalculating dividend growth rateasset utilisation ratio formulagdr sharesimpairment us gaapconstant growth rate formulaadvantages and disadvantages of discounted payback periodrevaluation modeldefine fixed expensecash flow coverage ratio exampleconfirming bank letter of creditdifference between managerial accounting and financial accountingytm calculationdifference between land contract and rent to ownmulti factor model financevertical complementary strategic alliancelessee accountingirr defineddebt to asset ratio analysis interpretationtrade debtorsoperating leases versus capital leasesactivity ratios formulasfinance lease v operating leaseocc margin calculatorassumption of eoq modelfx translation riskoperating versus finance leasenpv for projectmeaning of paybackwacc accountingwacc in financeissued subscribed and paid up capitalnet income formulassources of redemption of debenturesdirectpay indiawhat does return on capital employed meancharacteristics of finance leasewhat are sweat equity sharesthe accounting equation ishow to calculate current cash debt coverage ratiodiscounted payback calculatordebtor turnover ratio interpretationgross profit margin ratio calculatordouble entry bookkeeping system definitionstock turnover ratio analysis interpretationaverage rate of return method of capital budgetingdscr formulacalculation of dscrrelevance of dividend policyearnings per share computationactivity based budgeting definitioncreditors turnover ratio formula