What is a Finance Lease?

Definition: There are two types of leases; a finance lease and an operating lease

Features of a finance lease (capital lease)

A type of leasing contract where:

• The lessee will select an asset
• The lessor will purchase that asset
• The lessee will have use of the asset during the lease
• The lessee has to pay a series of payments for the use of the asset
• The lessor recovers a large portion of the cost if not all plus interest from the rentals
• The lessee then has the option to retain full ownership of the asset (by paying the bargain purchase price)

The lessor is the legal owner of the asset during the duration of the lease, whereas the lessee has control over the asset and is entitled to the economic benefits and risks of ownership.