Finance Leasing Manual - FLM1.03

What is 'finance leasing'?

Finance leasing is a method of providing finance. In legal form a finance lease is just another lease - the legal ownership of the asset lies with the lessor. However the economic ownership of the asset - the risks and rewards of ownership - lies with the lessee. In substance the finance lessee buys the asset with a loan from the finance lessor.

The special character of a finance lease lies in the way the rentals are calculated. In economic substance a finance lease is a loan of money with the asset as security. It is an arrangement under which one person (the lessor) provides the money to buy an asset which is used by another (the lessee) in return for an interest charge. The lessor has security because it owns the asset. The terms of the leasing arrangements aim to give the lessor a banker's interest turn and no more or less - however good or bad the asset proves to be.