What is Financial Leasing? Definition of Financial Leasing, Financial Leasing Meaning and Concept

The financial leasing or leasing is the rental of an asset with the right to purchase at the end of the contract.

Also, it can be called financial leasing, financial leasing or operating leasing, and it is a contract between two parties by which one makes a certain asset available to another in exchange for quotas (income) agreed in advance for a certain time.

In this sense, the lessee has the following rights:

  • Acquire ownership of the property at a price established at the end of the contract.
  • Return the property and terminate the contract.
  • Renew it by negotiating the new conditions.

For its part, the lessor makes available to the lessee a property of his property for which he will receive income for the use and enjoyment of it. Bearing, therefore, the obligation to sell the property at the end of the contract if the lessee exercises his right.

Advantages and disadvantages of leasing

For example, companies use this system for two fundamental reasons:

  • They do not need to make large investments of asset purchases, they can renew the assets periodically at the end of the contract. That is, make another leasing contract with a new asset.
  • In addition, leasing is considered an expense (rental payments) so these costs can be deducted.

Now, leasing also has some disadvantages:

  • The property is not owned.
  • As a general rule, the property cannot be returned until the contract ends.
  • It could be more expensive than other alternatives, so we must always value it in comparison with other options.
  • The clauses could be disadvantageous. So while it is true that the tenant has a series of rights, he also has a series of obligations that he must comply with if he does not want to be penalized.

Leasing use and features

The use of this system has grown exponentially in society, due in large part to the fact that anyone can access a property through a rental, which otherwise could not do so, due to the volume of investment or the cost of maintenance.

This type of financial leasing is used mainly for the leasing of cars, buildings and production machines in some sectors. In this case, and unless otherwise agreed, all maintenance expenses are borne by the lessor (owner) while the tenant must only pay an annual fee, the owner incurring in the good condition of the property., services and unforeseen costs.