Leasing

Finance lease vs operating lease

Operating leases work in a similar way to finance leases, but differ in the level of risk for the funder and the way they manage maintenance or other aspects.

Under a finance lease, the rental payments you pay during the primary lease period would cover the original cost of the asset. After this period is over, the finance company has recovered its investment and the asset can either be sold, or a secondary lease period (often at a lower monthly cost) could be entered into.

In the case of an operating lease, the lease period does not cover the full initial cost of the asset, and the asset finance company takes on the risk that the asset will have the expected residual value at the end of the lease period. This is typically used for assets such as vehicles or construction plant and machinery, as these assets will have residual value.

With a finance lease, the maintenance costs on the asset would be your responsibility. Operating leases, on the other hand, may transfer the liability to the asset finance company to protect you from any unexpected costs and ensure they maintain the longevity of their asset.