5 Important Differences between Operating Lease and Finance Lease

There are some differences between Operating Lease and Finance Lease that you need to know. Although both look and sound similar, Operating Lease and Finance Lease actually have quite striking differences. Let’s see the explanation below!

Differences between Operating Lease and Finance Lease

To understand the differences, let us understand the meaning of the two terms first. An Operating Lease is a commercial contract in which the lessor (the person who lends) allows the lessee (the person who borrows) to use the asset in lieu of periodic payments for a short period of time. After the contract expires, the goods must be returned to the owner.

Read Also: Definition, Example and Benefits of Finance Company

From here, maybe you have started to understand the slight difference between the two. To know more, let’s dive deeper into the differences. Here are some of the differences between Operating Leases and other Finance Leases:

1. Item Ownership

In an Operating Lease, ownership of the goods remains with the lessor. Meanwhile, in Finance Lease, ownership of the goods is transferred to the lessee.

This means that all matters relating to the object or object of the lease (administration, insurance, etc.) must be carried out by the party who owns the property.

2. Contract’s Characteristic

In Operating Lease, the contract of leasing is called a rental agreement or lease contract. Whereas in Finance Lease, the leasing contract is referred to as a loan agreement or loan contract.

3. Maintenance

As explained above in the Operating Lease, because the ownership of the goods is with the lessor, the lessor is obliged to carry out periodic maintenance of the object or object of the lease. On the other hand, in a Finance Lease, the lessee is the person who is obliged to take care of the goods or objects of the loan.

4. Contract Termination

In an Operating Lease, the lessor can cancel the contract without any penalty. Meanwhile, in Finance Lease, it is the lessee who can cancel the contract without any fines.

If the lessee terminates the contract on the Operating Lease, or the lessor terminates the contract on the Finance Lease, then the party will usually be subject to a fine that they must pay.

In order to avoid fines, both parties can negotiate a contract termination that can be agreed upon by both parties.

Conclusion

Now that you understand the differences between Operating Lease and Finance Lease, you should now be able to figure out which system is more suitable for you. Don’t choose the wrong lease because it will surely be a massive hurdle for you in the future.

Operating Lease is more suitable for organizations that require the use of goods or objects in a short period of time. Meanwhile, Finance Lease is more suitable for use by individuals who want to buy an item or object at the end of the loan period.

If you need financial assistance for your business, you can try CONFINS from AdIns. CONFINS dominates the market share as a core system software solution for the financial industry, especially multifinance businesses in Indonesia. As a market leader, CONFINS has been used by the majority of well-known financing companies in Indonesia for many years. To apply for a demo of this software, you can click the link here. For other information regarding AdIns’ products, visit our website here. Hopefully, this article about the differences between Operating Lease and Finance Lease can help you for your business’ success!