Types of Leases

Leasing can be referred to as the right to use an asset for a time period without having ownership on it while lessee pays lease rental to the lessor. Primarily, there are three types of leases – operating lease, financial leases and sale and lease back.

Operating Lease
Operating lease is one of the three types of leases. The operating leases are the short-term lease agreements that are cancellable. The operating leases are famous for offering instant service and convenience. The term period in the operating lease may vary with the asset and with the purpose of the use of asset.

For example, the tourists renting car or hotel room comes under the concept of operating lease. But the time period for the operating leases of the assets like office equipments or office computer may vary for three to five years. In case of the operating lease, the lease period covers a time that is less than the useful lifetime of the asset.
The lessor bears the responsibility of the asset maintenance in operating lease.

Financial Leases
The financial leases are the long-term lease contracts and are non-cancellable unlike operating lease. The leasing out of plants, land, machinery, ships, building and aircraft are the example of financial leases. The concept of financial lease is mainly popular with the high technology and high cost equipments. The financial lease is also often called as the capital or full-payment lease because it amortizes the cost of the asset over the lease term period. The financial leases are generally direct lease where after the lessee identifies the asset, the lessor buys it and then leases it to the lessee.
The sale and lease back is another type of lease. In this case the user sells his or her existing asset to a leasing company and leases the asset back from the lessor. The sale and lease back contract offers considerable amount of tax benefit to the user.

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Last Updated on : 27th June 2013

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