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What is the difference between Leasing and Financing?

January 29, 2024

Leasing and financing are two common methods for acquiring assets, such as cars or equipment, but they involve different financial structures and ownership arrangements. Here are the key differences between leasing and financing:

1. Ownership

Leasing: In a lease agreement, the lessee (the person or business obtaining the asset) pays regular payments to the lessor (the owner of the asset) for the right to use the asset for a specific period. At the end of the lease term, the lessee typically has the option to return the asset, renew the lease, or purchase the asset at its residual value.

Financing: Financing, often referred to as a loan or installment purchase, involves borrowing money to purchase the asset outright. The borrower (financing party) makes regular payments to the lender over a specified period until the loan is fully repaid. Once the loan is paid off, the borrower owns the asset outright.

2. Duration of Use:

Leasing: Leases are usually for a fixed term, such as 24, 36, or 48 months. At the end of the lease term, the lessee can decide whether to return the asset, renew the lease, or purchase the asset.

Financing: Financing typically involves a longer-term commitment, and the borrower owns the asset from the beginning. The loan term can vary, but it's often longer than lease terms, ranging from a few years to several decades depending on the type of asset.

3.Monthly Payments:

Leasing: Lease payments are generally lower than loan payments because they only cover the depreciation and financing charges for the time the lessee uses the asset.

Financing: Loan payments are higher than lease payments because they cover the full cost of the asset, plus interest and fees.

4.End-of-Term Options:

Leasing: At the end of the lease term, the lessee can choose to return the asset, renew the lease, or buy the asset at its predetermined residual value.

Financing: Once the financing term is complete, the borrower owns the asset outright, and there are no further payments. The borrower has full control over the asset and can keep, sell, or trade it as desired.

5.   Maintenance and Upkeep:

Leasing: Some lease agreements include maintenance and upkeep as part of the terms, reducing the lessee's responsibility for repairs. However, this can vary, and lessees should carefully review lease terms.

Financing: The borrower is responsible for all maintenance and upkeep costs, as they own the asset.

Both leasing and financing have their advantages and disadvantages, and the choice between them depends on factors such as cash flow, tax implications, long-term plans, and the desire for ownership. Individuals and businesses should carefully consider their financial goals and needs before deciding which method is more suitable for them. Consult with an Easylease professional to ensure you make the right decision for your specific circumstances. They can provide personalized guidance and strategies to help you get approved for the financing you need to grow your business.

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