Leasing: What It Is and How It Differs from a Loan

When an entrepreneur needs to acquire a vehicle or specialized equipment but doesn't have the full amount, they can opt for a loan. However, leasing is gaining popularity as a financing option. While it is similar to a loan in some ways, there are significant differences.

What is Leasing in Simple Terms?

Technically, leasing (for vehicles, specialized equipment, etc.) is a rental with an option to buy. In other words, an entrepreneur uses, for example, a car during the lease agreement term and makes monthly payments, with the vehicle's value gradually decreasing. At the end of the term, they can purchase the car by paying the remaining balance or choose not to buy it.

The process works as follows: a leasing company or bank buys the equipment that interests the business owner and then offers it to the entrepreneur for rent.

Comparing Leasing and Loans

First, let's look at how these financial programs are similar. In both cases, the client pays for the use of the property – to the bank or leasing company. Payments are made regularly (monthly). The terms are also similar: both programs are typically set for up to 84 months, and the borrower can choose the exact term within the allowed range.

How do these financial tools differ?

• Purpose. With a loan, the client purchases the equipment outright, while with a lease, they use the equipment with the option to buy it at the end of the term.
• Ownership. If you take out a loan, you immediately become the owner of the purchased equipment. With leasing, the equipment remains the property of the leasing company until it is bought out. This can be beneficial as the leasing company pays the vehicle tax.
• Depreciation. A loan does not affect depreciation. With leasing, accelerated depreciation is used. If the car is fully depreciated by the end of the lease, the borrower won't have to pay vehicle tax after purchasing it.
• Interest Rate. Loan interest rates are usually fixed. Leasing agreements use a cost increase rate, which includes not only the equipment's cost but also acquisition expenses and the leasing company's commission.
• Security Requirements. Loans often require guarantors or collateral, which is not common in leasing since the equipment is owned by the leasing company.
• Early Repayment. Early repayment is common for loans but not typically available for leasing.
• Down Payment. Most loans do not require a down payment, whereas leasing does. Usually, an advance of 10% of the equipment's value is needed.
• Payment Schedule. Loan payments are made monthly. Leasing programs also offer monthly payments but can be customized, which is useful for seasonal businesses (e.g., paying more in summer and less in winter).

Advantages and Disadvantages of Leasing

Advantages:

• Flexibility.  Leasing allows for seasonal business adjustments and personalized payment plans. It also offers the option not to purchase the equipment at the end of the term, allowing for a new lease on different equipment.
• Savings. Leasing payments are deductible expenses, reducing taxable income. Additionally, vehicle tax is not paid by the lessee.
• Convenience.No need to find guarantors or collateral.
• Practicality.Leasing payments do not impact credit history, enabling simultaneous loans for other business needs.

Disadvantages:

• Ownership: Until purchased, the leased equipment belongs to the leasing company.
• Regulations: Leasing companies strictly monitor their property, and violations of use or insurance rules can result in fines.

Types of Leasing

Several types of leasing are distinguished.

Financial Leasing is the most common, involving three parties: the consumer (customer), seller, and buyer (leasing company purchasing the equipment for the consumer). The lease term exceeds the equipment's depreciation period, allowing the lessor to recover 100% of the equipment's cost.

Sale and Leaseback is similar to financial leasing. Here, the lessee sells the equipment to the leasing company, which then leases it back to the lessee, thus providing capital while allowing the use of the equipment.

Operational Leasing is less common, with lease terms shorter than the equipment's depreciation period. After the lease term, the equipment is leased to another client.

Internal and International Leasing: Internal leasing involves parties within the same country, while international leasing involves parties from different countries.

Subleasing: The lessee can sublease the equipment to another lessee under a sublease agreement.

Based on sales terms, leasing is classified as net and full.

In net leasing, the company excludes insurance and maintenance costs, lowering monthly payments. The equipment must be returned in good working condition at the end of the lease. Full leasing includes all additional expenses in the monthly payments.

Other types include Secondary Leasing, where unpurchased equipment is leased to another lessee, and Bank Leasing, where the lessor is a bank.

Legal Framework

In Kazakhstan, leasing is an effective financial tool for supporting businesses, used alongside preferential loans and subsidies. It stimulates entrepreneurship and strengthens the economy.

Leasing in Kazakhstan is regulated by the Law No. 78 "On Financial Leasing" from July 5, 2000, covering all aspects of leasing, from types and subjects to equipment buyout conditions.

How to Lease Equipment?

The process is simple. First, choose a leasing company or bank as the lessor, which determines the leasing terms. Then, resolve the seller issue. Leasing companies often have a network of partner suppliers.

Next, submit an application for financial services, gather necessary documents, and provide them to the lessor. The lessor's specialists will perform a financial analysis and make a decision. If approved, sign the contract, make the down payment, and collect the equipment.

Carefully review the contract for important details such as payment terms and amounts.

Bank CenterCredit offers leasing services for businesses, including financial auto leasing with favorable rates and quick processing.

This article has been translated from its original language using neural network-based translation technology.