Lease

Some assets are worth using but not worth owning. A lease is how you get the use without the ownership.

The owner is called the lessor. The user is called the lessee. The lessee pays for the right to use the asset for an agreed period.

Property, vehicles and machinery are the usual examples. Large companies lease their cars this way.

The key point is what happens at the end. Nothing changes hands. The lessor was the owner throughout and stays the owner. The lessee never becomes the owner, even after the whole lease period is over.

That is the whole difference from a hire purchase, where the buyer does become the owner once the last instalment is paid.

Section 4.7.5 defines a lease as a contractual agreement where the owner of an asset, called the lessor, allows another person, called the lessee, to use the asset for a certain period of time in exchange for the payment of lease. The assets where a lease agreement is normally seen are property, vehicles and machinery.

The workbook draws exactly one distinction, and it is the examinable one. In a lease the lessor remains the owner of the asset, and the lessee cannot become the owner even after the specified lease period is over. In a hire purchase (section 4.7.4) the person paying the instalments becomes the owner when the final instalment is paid. Same monthly outgo, opposite end state.

The workbook adds that leasing is largely used for vehicles by large companies.

Two consequences follow from the ownership point, and both matter in a household balance sheet:

• A leased asset is not an asset of the lessee. It never enters his personal balance sheet or his net worth, however many years he has paid for it.
• Lease payments are, in the workbook's own time-value terms, an annuity due — rent and lease payments fall at the beginning of each period, unlike an EMI, which falls at the end.

Section 4.7.5 carries no figures at all — no tenor, no rate, no residual value, no minimum lease period. The workbook teaches the lease only as a contract structure, so a numeric question in this paper will come from the loan sections, not from here.

Illustrative figures. Kavya needs a car for a 4-year posting in Pune. Two routes, and the same car priced at Rs 12,00,000.

The monthly numbers look almost identical. The end states are not comparable at all. The hire purchase costs her Rs 2,28,800 more in total, and leaves her with a Rs 5,00,000 asset. The lease leaves her with a returned car and the deposit back.

So the question is never which monthly figure is lower. It is whether she wants the asset. For a 4-year posting after which she leaves the city, the lease may be the better answer. For a household keeping the car for 10 years, paying for use and handing it back at year 4 is the expensive choice.

And on her personal balance sheet through all 4 years, the leased car is neither an asset nor a liability. The financed car is both — Rs 12,00,000 on one side and the outstanding loan on the other.

Chapter 4 (Debt Management and Loans), section 4.7.5, in the run of loan terms that also gives hire purchase at 4.7.4 and amortisation at 4.7.6. The question is nearly always the ownership contrast: which arrangement leaves the user as owner at the end. Lease also appears in Chapter 2 as the workbook's example of an annuity due.

• Lease versus hire purchase is the whole point. The lessee never becomes the owner; the hire purchaser does, on paying the final instalment.
• A leased asset is not on the lessee's balance sheet. Counting it inflates assets and net worth.
• Lease payments are an annuity due, EMIs are an ordinary annuity. Chapter 2 uses rent and lease payments as its beginning-of-period example.
• "Largely used for vehicles by large companies" is the workbook's own note. Do not assume it is a retail housing product.
• A lower monthly payment is not a cheaper deal. Compare what each route leaves you owning.
• Do not confuse the lessor with the lessee in an exam option. The lessor owns; the lessee uses.