Difference between Buying vs Leasing
Acquiring an asset, whether for business or personal purpose, requires an important choice to be made between whether to buy the asset (Buying) or lease the asset (Leasing). Both buying vs Leasing options have their pros and cons. Let’s try to understand the same along with advantages and disadvantages associated with both buying vs Leasing.
Buying in simple parlance means the purchase of an asset by the business wither by making lump sum payment or via installments. Business can purchase the asset either through its own internally accrued funds or by borrowing to finance the purchase. In other words, buying involves upfront payment for the asset purchase and result in big cash outflow. Further buying also results in the change of legal ownership.
Leasing, on the other hand, is a contractual agreement whereby the lessor, who is the owner of the asset, allows the lessee to use the asset for a specified period of time in return for periodic payments. Leasing involves two parties- Lessor and Lessee. In simple words leasing involves renting out long-term assets by the owner of the assets ( Lessor or leasing company) to another party (known as lessee) for a regular consideration for a specified period and as such ownership doesn’t change hands at all.
A lease is further classified into two types namely:
Operating Lease: Under Operating lease the owner of the asset (lessor) basically allows the user (lessee) to use the asset as part of a rental arrangement. All the risk associated with owning the asset is retained by the lessor. No asset or liability is reported by the lessee and the periodic lease payments are recognized as the rental expense in the income statement of the lessee. Usually, an operating lease will be for a period which is substantially shorter than the useful life of the asset.
Finance Lease: Under a Finance lease, the lessee takes most of the risk associated with owning the asset. A finance lease is a purchase of an asset which is financed by raising debt. In other words, the lessee is buying the asset outright but financing the purchase by paying rent rather than paying a lump sum upfront. Usually, finance lease will be for a period similar to the likely life of the asset. A finance lease is known as Capital lease in the United States.
Buying vs Leasing Infographics
Below is the top 7 Difference between Buying vs Leasing
Key Difference between Buying vs Leasing
Both Buying vs Leasing are popular choices in the market; let us discuss some of the major Differences Between Buying vs Leasing:
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- Buying results in a change of ownership while in case of leasing ownership remain same, however, at the end of the lease (particularly in case of finance lease) lessee can get ownership transferred from lessor on payment of a nominal amount.
- Buying involves a buyer and a seller whereas Leasing involves lessor and lessee.
- Buying is a balance sheet item and is shown in the balance sheet of the buyer in Asset side whereas leasing is an off-balance sheet item and is not shown in the Balance sheet instead rental payment is debited from Income statement ( in case of Operating lease).
- Buying allows the buyer to use the asset throughout the economic life of the asset and also to enjoy the residual value of the asset whereas in case of leasing it is usually for a specified period which is usually shorter than the economic life of the asset and lessee doesn’t enjoy the residual value of the asset as ownership remains with the lessor (in case of Operating Lease)
Head To Head Comparison Between Buying vs Leasing
Below is the list of points describe the comparison between Buying vs Leasing
| The basis of comparison between Buying vs Leasing | Buying | Leasing |
| Meaning | It refers to the purchase of an asset by paying the lump sum price for it. | It is basically a rental arrangement whereby one party pays a prefixed amount for a specified period to use the asset. |
| Initial cost | It involves the total cost of owning the asset. | It involves only the cost of using the asset. |
| Legal Ownership | Buying involves an exchange of ownership once the buyer pays the complete amount of consideration. | Lessee has the option to purchase the asset at the end of the lease term or return the same. |
| Risk of damages | Buyer takes care of all the risk associated with damage to the asset and repairs and maintenance expenses are also borne by the buyer. | In case the lease is an operating lease, the lessor (owner of the asset) takes care of all the risk arising out of damage and also all repairs expenses are borne by them, however, in case of finance lease lessee bear all the expense related to repair and maintenance. |
| Parties involved | Two parties-Buyer (one who is buying) and Seller (one who is selling) | Two parties-Lessor(owner of the asset) and Lessee (user of the asset) |
| Term and Residual value | Buying is usually for the entire economic life of the asset and proceeds from the residual value of the asset after its useful economic life are enjoyed by the buyer, is the legal owner of the asset | In case of an Operating lease, the term of the lease is usually shorter than the useful life of the asset.
In case of a finance lease, the term of the lease is usually the entire life of the asset and at the end of the tenure on lessee can get ownership transferred from lessor on payment of a small sum which is usually very less compared to the actual cost of the asset; lessor will enjoy the proceeds from the residual value of the asset. |
| Treatment in Balance Sheet | Shown under Asset category of the Balance sheet of Buyer | In case of operating lease, nowhere it is shown. Only rental payments are debited from the Income Statement.
In case of a finance lease, at the inception of lease lessee will add an equal amount to both assets and liabilities on the balance sheet and over the term of the lease, the lessee will recognize depreciation expense on the asset and interest expense on the liability |
Final Thoughts
The choice between buying vs leasing depends upon the needs of the business and the asset it plans to acquire. Both buying vs leasing has their pros and cons which need to be taken into consideration while making a choice.
Business planning to acquire assets which are prone to technological development are better off in taking them on lease rather than buy as the risk associated with the asset getting outdated are better-taken care in case of leasing than buying. It is prudent for the business to assess the asset type and business needs before making this critical decision of buying vs leasing.
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