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Operating Lease Vs Finance Lease

Those that require one or more vehicles for their business activity are seeing operating leasing as a smart way to add cars without compromising their capital.

But what is an operating lease and how is it different from a finance lease?

What is the operating lease?

This is the traditional lease in which, through a lease, the owner of an asset – in this case, one or more vehicles – transfers the right of use to a company in exchange for the payment of a monthly fee at a fixed term.

For companies, this is a beneficial figure since, accounting, the value of the canon corresponds to an expense, deductible one hundred percent of income tax since the said value is never recognized as an asset or liability.

What is finance leasing?

This type of lease is mainly identified by the purchase option offered at the end of the lease so that the lessee can take over the asset.

As a figure, it is a kind of mix between the traditional lease and the figure of alienation or sale. Financial leasing is known as leasing and, in addition to the above, it differs from operating because, despite being a lease, the value of the canon is not treated as an expense or cost. The reason: the asset is recognized.

In addition, companies that acquire vehicles through financial leasing or leasing are transferred all the risks and benefits implicit in the ownership of the asset, without transferring ownership (it is always from the financial entity that grants the leasing).

Main differences between operating leasing (renting) and financial leasing (leasing)

Operating leasing (renting):

Contract duration: flexible (between 3 and 5 years).

Termination of the contract: the asset is returned to the rental company or the contract is renewed with another vehicle (s).

Landlord: normally it is a financial entity.

Vehicle ownership: it belongs to the leasing company, but the lessee assumes the expenses of the asset as if it were his own.

Expenses (insurance, maintenance, taxes): assumed by the leasing company or renting company.

Purchase option: No.

Services and assistance: all services necessary for the operation included.

Monthly fee: it remains fixed during the entire period of the contract.

What the fee includes: it usually includes services such as acquisition and registration expenses, taxes, insurance such as SOAT, taxes, mechanical technical reviews, maintenance and repairs.

Financial leasing:

Duration of the contract: minimum two years.

Termination of the contract: the lessee decides whether to make use of the purchase option or not, that is, if he takes it or returns it and terminates the contract, or if he wishes to extend it for another period of time.

Landlord: normally it is a financial entity.

Vehicle ownership: it belongs to the leasing company, but the lessee assumes the expenses of the asset as if it were his own.

Expenses: The lessee or the company that pays the leasing, since the risks assume them and benefits derived from the property are transferred.

Purchase option: Yes, at the end of the contract.

Services and assistance: requires resorting to third parties or external providers.

Monthly fee or canon: it may vary depending on the adjustments of the financing interest and additional costs associated with maintenance and others.

What the fee includes: includes the amortization of the cost of the vehicle, financing, and taxes.

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