What are the types of Leasing ? Meaning of Operating Lease/Leasing. Meaning of Financial Lease/Leasing.

A lease contract has many variations depending on the type of the leased equipment, amortization period, residual value of equipment, period of leasing, preference for the expiry of lease etc. Various types of leasing transactions are operating in the market on the basis of these variants. Parties to the leasing choose that type of leasing which will be most beneficial for them. The leasing options may be grouped into two broad categories as under:

1. Operating Lease: In this type of lease transaction, the primary lease period is short (depending on the agreed period) and the lessor would not be able to realize the full cost of the asset/equipment and other incidental charges thereon during the initial lease period. Besides the cost of asset/machinery, the lesser also bears insurance, maintenance and repair costs etc. The lessee acquires the right to use the asset for a short duration as agreed in lease deed. Contracts of operating lease normally provide for a choice to the lessee/lessor to end the lease after due notice. These agreements may generally be preferred by the lessee in the following circumstances:

• When the asset is subject to rapid obsolescence.

• When the long-term suitability of asset is uncertain.

• When the asset is required for immediate use to tide over a temporary problem.

Computers and other office equipment are common assets which form the subject matter of many operating lease agreements.

2. Financial Lease: As in contradiction of the temporary nature of an operating lease contract, the financial lease contract is a long-term arrangement, which is irrevocable during the primary lease period which is generally the full economic life of the leased asset i.e. period is such that asset useful life. Under this agreement, the lessor is assured to appreciate the cost of purchasing the leased asset, cost of financing it and other administrative expenses as well as his profit by way of lease rent during the initial (primary) period of leasing itself. Financial lease comprises shifting almost all the risks related to ownership and profits arising therefrom except the legal title to the lessee against his irrevocable undertaking to make unconditional payments to the lessor as per agreed schedule. This is a closed-end arrangement with no option to lessee to terminate the lease agreement subsequently. In such lease, the lessee has to bear insurance, maintenance, and other related costs. The choice of asset and its dealer is normally left to the lessee in such dealings. The alternatives under the financial lease are as under:

• Lease with purchase option-where the lessee has the right to purchase the leased assets alter the expiry of initial lease period at an agreed price.

• Lease with lessee having residual profits-where the lessee has the power to share the sale profits of the asset after the termination of the initial lease period and/or recommence the lease contract at a lower rental.