Leasing: Benefits, Types, and Differences from Credit

Leasing has become popular for many businesses and individuals who need assets but can't afford to purchase them outright. With leasing, you can use items like cars, machinery, or equipment without owning them. This financing model offers flexibility in payments and reduces upfront costs. But what exactly is leasing? Let's dive deeper so you can understand its advantages and potential risks.  

What is Leasing?

Leasing is a financing arrangement that allows individuals or companies to use assets without buying them. According to the Financial Services Authority (OJK), leasing allows a lessee to use an asset owned by another party (lessor) for a specific period in exchange for periodic payments. 

One advantage of leasing is purchasing the asset at the end of the lease term, as stipulated in the Ministry of Finance Regulation No. 84/PMK.012/2006. While this option is not mandatory, it provides flexibility for businesses or individuals wanting to eventually own the asset. 

Leasing involves several parties, including the lessor, lessee, supplier, and a bank to facilitate the transaction. In general, leasing is a rental contract that allows the lessee to obtain the needed assets with staggered payments. 

Benefits of Leasing

Leasing offers numerous benefits for individuals and businesses, particularly regarding financial management and asset utilization. Here are some key advantages of leasing:  

1. Mitigating the Impact of Inflation

Leasing can protect against inflation because payments are based on the initial agreement, locking in the asset's price even if the exchange rate or asset price increases in the future.

2. No Upfront Collateral

Unlike conventional loans, leasing doesn't require upfront collateral. The leased asset itself can serve as collateral.  

3. Payment Flexibility

Leasing offers flexibility, as terms, including contract duration and payment amounts, can be negotiated to suit both parties' needs.  

4. Alternative Financing Source

Lessees can use assets without a large upfront capital outlay, as the lessor fully finances the asset.  

5. Quick and Easy Process

The leasing process is generally faster than obtaining a bank loan. The simple administrative procedures and shorter approval times are attractive features.

6. Legal Protection

Clear and legally binding contracts provide certainty for all parties involved, reducing the risk of disputes.

7. Minimized Asset Depreciation Risk

Since the leased asset doesn't belong to the lessee, the risk of asset devaluation or obsolescence is minimized. After the contract ends, lessees can return the asset and upgrade to a newer model.

Differences Between Leasing and Credit

Credit and leasing are two common financing methods for acquiring goods or services. While both aim to help individuals obtain desired items, there are significant differences. Many people mistakenly believe that credit and leasing are the same thing. To avoid confusion, here are some key differences between the two:

1. Definition

The primary difference between credit and leasing lies in their definitions. Credit is a loan a bank or financial institution provides, with or without collateral. On the other hand, leasing is a rental arrangement for assets for a specific period.  

2. Object of Financing

Another crucial difference is the type of asset being financed. Credit can be used to fund any goods or services that the borrower will eventually own. In leasing, the asset is leased to the user for a specific period. In other words, the lessor retains asset ownership throughout the lease term. 

3. End of Contract

At the end of a credit contract, the borrower must repay the principal and interest as agreed. In leasing, the lessee has two options at the end of the agreement: purchase the asset at a predetermined price or return it to the lessor. Both credit and leasing are valuable financing options for individuals and businesses. Understanding the fundamental differences between the two is essential when making the right choice.  

Types of Leasing

Leasing comes in several types, each with unique characteristics:

1. Capital Lease

A long-term lease is when the lessee eventually acquires asset ownership after the lease term. The leased asset is recorded as a fixed asset on the lessee's balance sheet. The lessee is responsible for all maintenance and insurance costs.  

2. Operating Lease

Typically used for short-term rentals and doesn't provide ownership to the lessee after the lease period. Lease payments are treated as operating expenses, and there's no fixed asset recorded on the balance sheet. The lessor is responsible for maintenance, insurance, and repairs.

3. Sales Type Lease

In this type of lease, companies sell their products through leasing and profit from the difference between the asset's selling price and book value, plus interest income from lease payments. This allows manufacturers or sellers to generate immediate revenue from sales and long-term income from interest.

4. Cross Border Lease

This structure involves a lessor and lessee from different countries and is often used to finance high-value assets like aeroplanes or ships. It offers tax advantages and financing benefits for international companies but faces more complex legal and regulatory challenges in each country. 

5. Leverage Lease

Involves at least three parties: the lessor, lessee, and a third party providing additional financing for the asset. In this scenario, the lessee rents the asset from the lessor while the third party (usually a bank or investor) provides additional funds. This allows the lessor to minimize financing risk by sharing capital with another party.

By understanding these leasing concepts, you can make more informed decisions about your financing options, whether for personal or business needs.

Realize Your Business Fleet with TAF

Are you looking for financing for your business fleet? TAF Fleet is the solution. With the support of our professional team, TAF Fleet is ready to support your business operations through vehicle financing solutions with various fleet types and provide the best service. 

Your trust is our priority. Therefore, you can rest assured that TAF is registered and supervised by the Otoritas Jasa Keuangan (OJK) to ensure the security of your transactions. So, what are you waiting for? Contact us now!