What is a Finance Lease?

Definition: There are two types of leases; a finance lease and an operating lease.

Features of a finance lease (capital lease)

A type of leasing contract where:

  • The lessee will select an asset
  • The lessor will purchase that asset
  • The lessee will have use of the asset during the lease
  • The lessee has to pay a series of payments for the use of the asset
  • The lessor recovers a large portion of the cost if not all plus interest from the rentals
  • The lessee then has the option to retain full ownership of the asset (by paying the bargain purchase price)