OPERATIONAL versus FINANCE LEASE: Find out which option suits your needs best!
You´ve probably thought many times on how to get a new car, but you ran into complicated legal details and stopped for fear that you might reach the wrong decision. One commonly used way by those who need one or more cars is to sign a leasing contract with a specialist company.
Broadly speaking, this contract involves the transfer, for a limited period, of the right to use an asset from the leasor (leasing company) to the user (the lessee), provided that the latter pays a monthly installment, called the leasing installment. To make a decision you need to know, first of all, what the difference between finance lease and operational leasing is, in order to be able to make an informed choice.
Of course, finding the definitions and the terms each type of financing entails is an important first step, but somewhat simple, because the most difficult part is weighing the advantages and the disadvantages and making the decision to go for operational or financial leasing.
To be sure you have made the right choice, analyze very well, in advance, what exactly your needs are and what plans you have after concluding the contract.
Table of Contents
1. Operational vs. finance lease – how they differ and what their implications are
Although they have many things in common, the two financing types present defining differences, which allow you to understand the usefulness of each:
- The destination of the goods at the end of the contract
An important similarity between the two types is that, in both cases, the leasing company is the owner of the good, and the main difference between the operational and the financial lease is related to what happens after the expiration of the contract, namely who the good will belong to. Therefore, in the case of operational leasing, at the end of the contract, the car you rented remains the property of the leasor, while at the expiration of the finance lease contract, you have the opportunity to buy the vehicle at its residual value, thus becoming the owner.
- Costs incurred during the contract period
The user of the car rented through operational leasing does have to manage any vehicle repairs, tire replacement, fees, taxes and insurances, as the leasor has these responsibilities. On the other hand, if you go for finance lease, maintenance and all unforeseen costs will be your responsibility.
Mobility gets extra miles in the case of operational leasing, where the company provides a replacement car in case of an accident, unlike finance lease, where you have to find a replacement car yourself, while yours is in service for repairs.
- Accounting considerations
Another difference between finance lease and operational leasing is given by the accounting registration of the goods. Thus, if going for finance lease, the users must register the car in their accounting records, considering the fact that at the end of the contract they become owners. Instead, the car leased through operating lease will be recorded in the leasor´s accounting.
So, if you want to become the owner of that car at the end of a fairly long period in which you paid monthly installments, the solution is finance lease. On the other hand, if you are the type of driver who wants to have a new model every two or three years, the most suitable option is operational leasing. But, if your business has a large fleet, which requires periodic renewal, operational leasing is definitely a better solution.
To conclude, considering all these, the choice of operational leasing vs finance lease should no longer be a problem for you!
2. Frequently asked questions about operating versus finance lease
Is it necessary to pay an advance for operational leasing?
An advance payment is only required when concluding a finance lease contract, not in the case of operational leasing, but the amount in the operational leasing is flexible.
Are there any restrictions regarding the number of kilometers traveled during the leasing contract?
Yes, these restrictions exist in the case of operational leasing, as opposed to finance lease which offers greater flexibility, without any limitations to the number of kilometers that can be covered during the contract.
Under which situation is the amount of the monthly leasing instalment higher?
The monthly installment for operational leasing could be higher than the instalment we pay for finance lease. We must consider that this distributes in monthly instalments the advance payment made in the case of finance lease, on one hand, and, on the other hand, a series of services providing seamless mobility: payment for all the taxes, RCA and CASCO insurance, full maintenance and repairs, tire management – purchase, change and storage, as well as road assistance.
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