Types of lease contract

Operating lease

An operating lease is contract of relatively short-term in length. This leave is also known as service or maintenance lease. The payments under an operating lease contract are insufficient to recover the full cost of the asset for the lessor. As a result, the contract period in an operating lease tends to be some what less than the usable economic life of the asset and the lessor expects to cover the costs from renewal rental payments, the sale of the asset at the end of the lease period, or both.

Characteristics of operating lease.

The most important characteristic of operating lease is a cancelable contract with proper notice. The term of this type of lease is shorter than the asset’s economic life. Basically the asset’s having highly chance is technology are leased under this contract, for example, copying machine, computer, computer hardware, word processor, automobiles and its insurance etc. Most operating lease requires the lessor to maintain the leased asset. The lessor also responsible for any property taxes and insurance of the asset.

Capital or financial lease.

A capital lease is also known as financial lease. With a financial lease, the total payments over the lease period are greater than the lessor’s initial cost of the leased asset. In other words, the lessor must receive more than the asset’s purchase price to earn its required rate of return on investment. This lease contract is longer term lease than the operating lease contract.

Characteristics of capital lease

Financial lease is a non cancelable lease contract; therefore, the lessee is compelled to use the asset over the pre-specified period of time. With financial lease, the lessee is responsible for the maintenance of the asset. Financial lease, normally is used for leasing of non technical and long term assets like lands, buildings, large piece of equipments, ships etc. Financial lease is a contract like debt. The inability of the payment of lease rent leads the lessee into bankruptcy. Some financial leases provide for a renewal or repurchase option at the end of the lease.

Direct Lease

A direct lease results when a lesser owns or acquires the assets that are leased to given lessee. Under this agreement the lessee did not previously own the asset that is leasing. The lessee can obtain the asset either from the manufacturers or financial institutions. Meaning that, the lesser can be either manufacturers or financial institutions.

Leveraged lease

Another type of lease contract is leveraged lease. From the stand point of the lessee, it is not different from the other types of lease. The only different is that the leased asset is financed with debt and equity. When the capital outlay is large the assets are financed with the amount borrowing from the bank or finance institutions and leased these assets. Hence, in contrast to the two parties involve in the lease contracts previously described, there are three parties involved in the leveraged leasing: the lessee, the lesser and the tender. Leveraged lease is very popular in very expensive assets.