A finance lease allows customers to use an asset while making installment payments to the owner, transferring all risks and rewards of ownership to the customer. This is a common form of leasing for various equipment types, including software and furniture. Interest accrues on the balance owed, and the lessee assumes most of the risk. Consumers should consider the total amount paid for the asset and look for alternatives if the cost seems too high.
A finance lease is a type of lease that allows customers to take possession of an asset and enjoy its use while making a series of installment payments to the owner. During the term of the lease, the borrower is responsible for the maintenance of the asset, an arrangement that effectively transfers all the risks and rewards of ownership to the customer. With some forms of leasing, the customer agrees to pay a specified number of installment payments, and the property is released once all of those payments are made. Others require a series of installments, plus a larger payment at the end of the lease period before ownership is transferred.
The concept of financial leasing is actually the most common form of leasing today. This model can be used with almost any type of equipment, such as a vehicle, construction equipment, or even recreational boats. Leasing of this type can also be used to acquire software over time, as well as a means to purchase electronic equipment such as computers and televisions. It is even possible to buy furniture through a financial lease.
Consumers often find that a finance lease is a viable option when paying for an item in full is impossible. By arranging a series of monthly payments, the owner delivers the asset to the customer, who is free to use the asset as long as the payments are kept current. At the end of the lease period, the lessee has the option to return the asset to the owner or complete the terms necessary to acquire full ownership.
The owner also benefits from the terms of a finance lease. In exchange for allowing the lessee to assume control of the asset and make installment payments over time, interest accrues on the balance owed. As with most types of loan situations, interest is calculated based on the number of installment payments. If the lessee defaults on the lease at any time, the lessor or owner has the right to resume possession of the asset, and does not owe the lessee any compensation for payments made up to that time.
It is important to note that with a finance lease, the client assumes the majority of the risk associated with the transaction. For this reason, some consumers may not be comfortable with this type of financial agreement and will seek other methods to finance the purchase. Since the interest rate can be somewhat high compared to other financing options, consumers may choose to forego this type of lease when purchasing furniture or other household necessities. When considering a finance lease, it is important to consider not only the desirability of the transaction, but also the total amount ultimately paid for the asset; If that number seems exorbitant, looking for alternatives makes good economic sense.
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