Lease: Is It An Alternative to Loans?
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Lease (or Rental, or Contract Hire)

A lease can sometimes be an alternative to borrowing money

An alternative to Loans?

A lease provides an alternative way of you obtaining the use of property, whether it be a house, car, television, telephone system or piece of equipment used in your business.

However, with a lease you rent the property, usually paying a monthly rental, rather than buy it.

That means someone else owns it and when the lease comes to an end, the property reverts to the owner. If you are leasing a house, at the end of the period you have to vacate the house and the owner is then able to do with the house what he/she wishes. If you are leasing a car, at the end of the period you have to give the car back to the finance company. You then have to make new arrangements (though, some leases provide options for you to choose to buy the property when the lease has expired).

Pros and Cons

The advantages of a lease are that it can be cheaper in the short term, requiring a small down-payment and involving a low monthly payment. The disadvantage is that you don't own the property, so you have nothing to sell and therefore there is no resale value when the contract expires. This may make it more expensive in the longer term. Also, you usually have less flexibility in a lease compared with a loan (particularly flexible loans).

How to decide

The best way to decide between your options is, first, to decide whether a loan or lease best suits your circumstances. For example, are you willing and able to make a commitment to have the property for a fixed period of time? Or do you need flexibility to be able to get rid of the property if your plans change? The former tends towards a lease, the latter a loan.

If you are unsure, or there is no obvious answer to that question, then the next stage is to do a financial comparison. This involves constructing a spreadsheet to make some financial projections. You then compare the projected costs of the two options. You must ensure that you include all relevant costs, and our article (see link top left) gives some ideas on how to construct such a spreadsheet.

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