Loans vs Leases

Do you take a lease only when renting a house or a car? Are loans only meant for long-term projects? Many rarely look towards leasing as an alternative to loans and vice versa. At times, it’s not clear what the difference is between the two. After all, money still comes out of your pocket each month so it’s all pretty much the same, right? Wrong. There are significant variables between a loan and a lease. Here we take an in-depth look at the nitty gritty concerning the two.

Loans

Collateral

When applying for a loan, you may be asked to give up collateral. It could be a house, a car, equipment, and inventory among others. Collaterals are meant to secure the loan to cushion the financial institution from making losses in the event you are unable to pay.

Difficult to apply

Loans are usually only limited to people who show that they have the financial back up to pay back the loan. Be it a stable business or a good job, financial institutions are inclined to only offer loans to those individuals whose probability of paying it back is high.

Presence of extra costs

The list of additional fees one is asked to pay once they opt for the loan is almost endless. Remember, these extra costs are in addition to the monthly payments. Examples of these extra costs include,

  • Loan processing charges
  • Commitment fees
  • Application fees
  • Funding fees
  • Origination fees and so on.

Strict terms and conditions

If you are looking for a normal loan and are ok with the terms and conditions, then strict terms may not worry you. However, you may encounter certain unforeseen circumstances that may need money prompting you to either forfeit your loan payments or approach the bank for some leeway. This is usually not an option with loans. Here you either honour your payments as agreed or suffer the consequences.

Lease

No Collateral

Here, the only collateral is the equipment or asset being leased. However, in isolated cases, one may be asked to provide a form of collateral.

Easy to apply

It is very easy to apply for a lease even when it is unclear that you how your employment status is or if you are doing well financially. The main focus here is to offer convenience and service provided you can come up with enough cash to qualify for the lease and maintain the asset or equipment in good condition.

No extra costs

Almost all leases small scale leases have no additional charges attached. The payment is fixed and will not change for whatever reason throughout the term of the lease. However, when leasing equipment or property that is considered of high value, you may be asked for something small in addition to the fixed lease payments.

Flexible terms

Leases are very flexible. In many instances, you get to choose your own terms. You specify what payment schedule, down payment and purchase option you are most comfortable with.

With the above information, it will be easier to make your decision on whether your circumstances require you to go for a loan or a lease. This way, you don’t end up regretting your choice of financing when it’s too late.