Know the Difference Between a Lease and Installment Sale Agreement
In 2013 I ran the New York marathon for a charity that provides free financial education to the Mexican community living in New York. The director of this charity told us of a heart-breaking story of a middle-aged Mexican immigrant living in New York who always wanted to have her own car. She found the car of her dreams and her local bank agreed to finance it. The lady entered into a three-year contract with the bank. However, given her extremely conservative approach to finance, she decided that she would only start driving the car until it was paid off. She parked her newly acquired automobile in the garage for three years and religiously making the monthly payments. As soon as she had made the 36th payment, and was getting ready to take her machine out for a ride, she received a call from the bank who had financed the car asking her when would be a convenient time for them to pick up their car. The Mexican lady was gobsmacked, bewildered, and confused. She then discovered that instead of entering into an installment sale agreement with the bank, she had entered into a lease agreement. So what is the difference?
Leasing is a practice that allows a person to use the asset for an agreed period of time against payment of lease rentals. At the end of the term, the lessor can sell the asset to a lessee or terminate/extend the agreement as per mutual consent.
In an installment sale, the ownership transfers to the user at the end of the installment period. Whereas in a case of lease financing, the lessee has to transfer the asset to the lessor after the end of the lease period and the lessee has an option to purchase or not to purchase the asset.