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What is a Finance Lease?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 August 2016
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    Conjecture Corporation
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A finance lease is a type of lease that allows customers to take possession of an asset and enjoy the use of it while making a series of installment payments to the owner. During the life of the lease, the borrower is responsible for the upkeep of the asset, an arrangement that effectively transfers all the risks as well as the rewards of ownership to the customer. With some forms of the finance lease, the customer agrees to pay a specific number of installment payments, and is granted ownership once all those payments are made. Others require a series of installments, plus one larger payment at the end of the lease period before ownership is transferred.

The concept of a finance lease is actually the most common form of leasing today. This model can be used with just about any type of equipment, such as a vehicle, construction equipment, or even pleasure boats. Leasing of this type can also be used to acquire software over time, as well as a means of purchasing electronic equipment like computers and televisions. It is even possible to purchase furniture using a finance lease.

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Consumers often find that a finance lease is a viable option when it is impossible to pay for an item in full. By arranging a series of monthly installment 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 leasing period, the lessee has the option of returning the asset to the owner, or completing 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 is accrued on the balance due. As with most types of loan situations, the interest is calculated based on the number of installment payments. Should the lessee default 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 type of compensation for the payments made up to that point.

It is important to note that with a finance lease, the customer assumes the majority of the risk associated with the transaction. For this reason, some consumers may not feel comfortable with this type of financial arrangement, and will seek other methods of financing the purchase. Since the rate of interest may be somewhat high in comparison to other financing options, consumers may choose to forgo this type of lease when shopping for furniture or other household necessities. When considering a finance lease, it is important to look at not only the convenience of the transaction, but the total amount that is ultimately paid for the asset; if that figure seems to be exorbitant, looking for alternatives makes good economic sense.

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