Lease Finance vs. Term Loan

Lease is defined as a contract under which one party i.e. the owner of the asset, hereby called The LESSOR, provides the asset for usage to another party i.e. The LESSEE for the period of time known as the term of lease which is mutually agreed upon by the two parties, and charges a consideration in the form of periodic lease rental payments, for the asset. The ownership of the asset is retained by the LESSOR.

Term Loan

The term loan is a type of financing, given by financial institutions such as commercial banks, development banks, and special institutions for lending money. Normally, it is of two types: Long Term and Short Term. The borrower takes the lump sum amount and agrees to return the amount along with interest thereupon. The whole amount is repaid within the stipulated time in installments including both principal and interest. There is a processing fee as a cost to acquire this type of financing. Generally, the term loan is obtained for financing large expansion or diversification of an organization. The borrower has to submit his financial statements and his net worth capacity so that the lender can assess the ability of the borrower in paying back the loan, on the assumption that their profit will increase over time.

Lease Finance vs Term LoanFor raising a business’s supply capabilities, or for purchasing an asset, or for any sort of expansion, the term loan is an easy option to arrange finance in a short span of time.

Lease Finance vs. Term Loan

In easier terms: Should I lease or should I buy?

Down Payment

While taking an asset on a lease, down payment is not required. Only a periodic lease rental payment is required which is lower as compared to the percentage of down-payment. Whereas in the case of a term loan, the borrower has to pay a small percentage in the form of down-payment (margin money) at the beginning of the transaction and an installment amount at the required time and the balance amount is financed by the loan.

The option of Buying the Asset

The lessee uses the asset up to the lease period and pays the rentals. He has the option of buying the asset at the end of the lease. Whereas in the case of loan financing, it is compulsory for the user to buy the asset as soon as he gets the loan.


No security, in any form, is required for lease financing. Whereas the borrowers need to pledge his existing assets as primary /collateral security in case of a term loan.

Presentation in Financial Statements

In Lease, the value of the asset is not included in the financial statements. Whereas in the case of loan financing, the asset appears on the asset side and a corresponding liability for loans appear on the liability side.

Tax Implication

In the case where the asset is purchased on loan, the user can claim interest on loan payment (which decreases every year due to part payment of principal also) and the depreciation of the asset (which decrease every year due to written down value effect). Whereas in the case of lease financing, the user can claim only lease rentals which are uniform during the lease period.

Cash Flow

Since there is no purchase of an asset in lease financing, the cash flow is limited up to the lease rentals. Whereas in the case of the term loan, the cash flow includes downpayment, loan received purchase of asset and installment paid at the required time.

Transfer of Risk Due to Asset Devaluation

In the case of lease financing, the ownership of an asset is not attached to the user, so the risk of asset devaluation is transferred to the lessor. Whereas in the case of loan financing, the user of the asset has to bear all the risk of asset devaluation due to change in technology

In a nutshell, leasing makes it easier to get the usage of an asset for less money. So, leasing sounds advantageous for the entrepreneurs who are not cashing rich. But if we take the long-run view, we see that we will always have a payment to make but no ownership. On the other hand, if we consider buying an asset through term loan financing, after a few year’s installment payments, the asset belongs to the owner and the periodic payments also stops. The lease finance does not have the risk of asset maintenance and devaluation whereas this risk exists in the case of a term loan. It is the ultimate user to decide his needs and to weigh the pros and cons and what best suits to his organization.

Last updated on : March 10th, 2018
What’s your view on this? Share it in comments below.

Leave a Reply

Difference between Operating and Financial Lease
  • Types of Lease
    Types of Lease
  • American Depository Receipt
    American Depository Receipt
  • Euro Issues
    Euro Issues
  • External Commercial Borrowing (ECB)
    External Commercial Borrowing (ECB)
  • Subscribe to Blog via Email

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

    Recent Posts

    Find us on Facebook

    Related pages

    days receivable formulaadvantages and disadvantages of payback methodvariable costing definitionpayback method advantagesdifference between bond and debentureweighted average cost of capital wacchigh asset turnoverformula of dscrhow does invoice discounting workaccount receivable turnovermultiple irr calculatorbond callablefixed asset turnover ratio calculatorsale and leaseback disadvantageshow do you calculate average collection periodeps interpretationtangible assets and intangible assets examplesprofitability ratios accountingformula for contribution margin per unitwhat are some examples of variable expensesconglomerate examplefixed asset turnover ratio interpretationbank meaning in kannadabook debt to equity ratioliabilities equationdebit definition in accountinginternal accrualsoptimal capital budget definitionapt and capmwacc calculationscalculation of waccinternal rate of return formula examplethe term permanent current assets impliesassets turnover formulathe quick ratio excludes which of the followingbudgeting processesdefinition of arbitrage pricing theorynpv valuesdays receivables formulanpv and waccconvertibles bondsdividend formula accountinghypothecate meaningirr forumlapp&e turnoverlc at sight meaningamerican depositary receiptslease accounting entrieswhat are the advantages of operating and capital leasescash basis accounting journal entriesdefinition debentureadvantages and disadvantages of regression analysisfuture value discount rate calculatoraccelerated book depreciation units of production methoddebit credit rules accountingratio of fixed assets to long term liabilities formulaexporting advantages and disadvantagesapt capminternal rate of return example problemsdiff between cash flow and fund flowcanara bank calculatorcalculating an irrputable bonds definitiontemporary overdraftwhat is the difference between cash basis and accrual basisoverhead distribution cost accountingdefine acid test ratiotypes of intangible assetscarrying value vs market valuethe accounting equation ishow do you calculate noiwhat is meant by sundry creditorsdefine management accountantproduct extension mergernet income ebit