What is a Lease? Types of Leasing |Operating Lease v/s Financial Lease|
Lease means a right to use an equipment or capital goods on payment of periodical amount. Mainly, there are two principal parties to any lease transaction which includes lessor and Lessee. First One is Lessor which means the actual owner of equipment permitting use to the other party on payment of periodical amount. And second is the Lessee which means a Person who acquires the right to use the equipment on payment of periodical amount.
Types of Leasing
In this type of lease transaction, the primary lease period is short and the lessor would not be able to realize the full cost of the equipment and other incidental charges thereon during the initial lease period. Besides the cost of machinery, the lessor also bears insurance, maintenance and repair costs etc. Agreements of operating lease generally provide for an option to the lessee/lessor to terminate the lease after due notice.
It is a long-term arrangement, which is irrevocable during the primary lease period which is generally the full economic life of the leased asset. Under this arrangement lessor is assured to realize the cost of purchasing the leased asset, cost of financing it and other administrative expenses as well as his profit by way of lease rent during the initial (primary) period of leasing itself Financial lease involves transferring almost all the risks incidental to ownership and benefits arising therefrom except the legal title to the lessee.
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