Many times, We all listen to the terms of Lease and rent. but, some of them know the actual meaning of Lease and Rent and their Differences. Hence, friends, today we learn the basic terminology of Financial terms used in Business. i.e What is a Lease? and Types of Leasing.
What is a Lease?
Lease means a right to use equipment or capital goods on payment of a periodical amount.
Mainly, there are two principal parties to any lease transaction which include the Lessor and Lessee.
- Lessor which means the actual owner of equipment permitting use to the other party on payment of the periodical amount.
- Lessee which means a person who acquires the right to use the equipment on payment of a periodical amount.
What is the difference between rent and lease?
- A “lease” is an agreement with a tenant to use the property for a longer period.
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“Rent” is an agreement with the tenant to use the property for only a short period of time.
What is the Maximum Tenure of the Lease?
The lease of the property is time-bound and fixed for a time frame of 99 years from the date of purchase. The 99 years is considered to be about three generations. This will be the maximum period of the lease agreement.
Types of Leasing
There are different types of leases, but the most common types of lease used in Business is as follows;
- Operating Lease
- Financial Lease
1. Operating Lease
In this type of lease transaction, the primary lease period is short and the lessor would not be able to realize the full cost of the equipment and other incidental charges thereon during the initial lease period.
Besides the cost of machinery, the lessor also bears insurance, maintenance and repair costs, etc. Agreements of operating lease generally provide for an option to the lessee/lessor to terminate the lease after due notice.
2. Financial Lease
It is a long-term arrangement, which is irrevocable during the primary lease period which is generally the full economic life of the leased asset.
Under this arrangement lessor is assured to realize the cost of purchasing the leased asset, the cost of financing it, and other administrative expenses, as well as his profit by way of lease rent during the initial (primary) period of leasing itself Financial lease, involves transferring almost all the risks incidental to ownership and benefits arising therefrom except the legal title to the lessee.
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