What is Operating Lease? Definition of Operating Lease, Operating Lease Meaning and Concept
An operating lease is an agreement where the right to use an asset from the owner is transferred to another person. This, in exchange for a periodic payment.
This agreement is carried out for a specified period of time and is very similar to the common rental. It is mainly used for technological items such as computers and other office equipment that depreciate over the medium term, for example, five years.
Differences between operating and finance leases
One of the main differences between operating and financial leasing is that only the second incorporates the purchase option. This, at the end of the rental period.
That is, the financial lease is characterized by transferring all rights to the rented property at the end of the contract. Said transfer occurs only if the lessee so decides.
It should also be noted that financial leasing is often used for assets such as buildings and production machines. These depreciate less quickly than technological assets.
Advantages and disadvantages of operating lease
Among the advantages of operating leasing, the following stand out:
- There is no ongoing maintenance: The tenant is not responsible for various expenses. For example, in the case of a car, it is up to the lessor to pay taxes and licenses.
- There is no hefty outlay at the start of the contract: An operating lease rarely includes a down payment, unlike a finance lease.
- Update: The operating lease allows office equipment to be renewed every so often, for example, five years. In this way, the company can stay at the forefront of technology.
Notwithstanding the foregoing, the operating lease can have some disadvantages:
- There is no purchase option: It does not allow you to acquire the leased property at the end of the rental period. In other words, it is an expense without a minimum investment.
- It is useful only for rapidly depreciating assets: It is suitable for assets with a medium-term useful life. However, in the case of a home, for example, its value may increase. Therefore, it might be more convenient to acquire a financial lease to have the option to purchase the property.