When planning to buy an asset, customers have to make the decision of how to make the payments for the asset. They have the option of either paying the total amount of cash that the asset is worth up front, or to borrow the cash needed for purchasing the asset. In both these options, the total amount is paid when the asset is being purchased. Another option that is preferred by customers is known as leasing. In a lease agreement, a down payment is made by the lessee, after which he/she receives possession. Monthly installments then have to be made in accordance with the lease agreement or until the complete value of the asset has been paid. The ownership of the asset remains with the lessor; however, the lessee is handed over the asset and can use it till the time decided in the lease agreement.
This article discusses the terms buy and lease in detail and highlights the differences between the two terms.
Definitions and explanations
When the buyer pays full money for the asset, he/she obtains ownership of the asset. In this kind of arrangement, the ownership title is also transferred from the buyer to the seller, as well as the risks and rewards associated with it.
The buyer gets the right to use the asset by either paying the full amount at the time of purchase, or by making a down payment while obtaining possession of the asset and then making monthly payments for the remainder of the amount. In addition, they also have the right to transfer or sell the asset. The buyers are also responsible for paying for the maintenance of the asset.
Hence, buying an asset provides complete ownership of the asset to the buyer. In case the buyer takes a loan from the bank to purchase the asset, the ownership is with the bank till the total amount of loan is paid off.
Leasing is another arrangement in which the lessee is permitted to use the asset after paying its due consideration, which includes paying lease rental on a timely basis, for a term specified in the lease contract. The asset is bought by the lessor, who hands it over to another party, i.e. the lessee, to use it for an agreed time period, after they agree to make periodic payments.
In simple words, the long-term asset is leased by the owner to the lessee, in return for rental payments that the lessee has to pay throughout the lease agreement. When the lease period ends, the lessee simply returns the asset to the lessor and the leasing process concludes.
Lease makes it possible for a person to immediately obtain an asset that they want, without having to pay a large amount for purchasing it. In addition, the lease rental that is to be paid from time to time is less than the amount that would be paid while buying the asset.
Differences between buy and lease
The main difference between buy and lease has been given below:
Buying is the process in which the ownership of the asset is transferred to the buyer after making full payment for the asset. In contrast, leasing is an arrangement in which a person is allowed to use an asset owned by another party after agreeing to make predetermined payments periodically.
Buying involves an interaction between a buyer and a seller, while leasing is carried out between a lessor (the party that owns the asset) and a lessee (the party that uses the leased asset).
The worth of the asset in a buying arrangement is the cost of getting ownership of the asset, while in a leasing arrangement, the worth of the asset is the amount paid to use the asset.
4. Right of selling
Buying gives the right of selling or transferring the asset to the owner at any time they require. However, this right is not conferred to the lessee because they do not own the asset. In fact, after the lease rental period ends, they have to return the asset to the lessor.
In buying, the full value of the asset has to be paid in cash, or as equal monthly installments for a definite term. In leasing, however, the lessee can use the asset by paying a fixed rental amount each month.
6. Duration of use
When a person buys an asset, they have full rights over it across the entire economic life of the asset. On the other hand, a person who leases an asset can only use the asset for a definite time period.
7. Responsibility of maintenance
The buyer is responsible for fixing any issues that arise in the asset and carrying out its routine maintenance activities. However, in a leasing arrangement, the responsibility of repairs and maintenance is decided in the terms of lease.
8. Balance sheet disclosure
In a buying arrangement, the asset is bought, and so it is disclosed as a non-current asset in the asset side of the balance sheet. However, a leased item is not included in the lessee’s balance sheet.
Buy vs lease – tabular comparison
A comparison of buy and lease in tabular form is given below:
|Getting ownership of the asset after paying its full amount||Getting the right to use an asset after making timely lease rental payments|
|Buyer and seller||Lessor and lessee|
|Cost of gaining the asset’s ownership||Amount paid to use the asset|
|Right of selling|
|Available with the buyer||Not available with the lessee|
|Paid in full or as fixed monthly installments||Lease payments are made periodically|
|Duration of use|
|Throughout the asset’s economic life||Agreed time period|
|Responsibility of maintenance|
|With the buyer||Decided in the lease contract|
|Balance sheet disclosure|
|Shown as non-current asset||Not disclosed|
Conclusion – buy vs lease
The decision of leasing or buying an asset is made after considering why the asset is required. Leasing is a better option when the asset is required for a short time (just a few months or a year). This is because less payment has to be made in leasing, and you will be able to use the asset for as long as you need, after which you can return the asset to the owner. Leasing saves the customer from having to make payments in the long-term. However, if there is long-term value of the asset and you feel that you will be using it for an extended period of time, the best option would be to purchase the asset. You would immediately get ownership of the asset if you make the full payment up front, or after paying off the loan taken to obtain the asset.