BLM00720 - Introduction: why lease: increased security

Leasing is not necessarily a purely tax-driven form of lending. Tax undoubtedly has a lot to do with leasing, particularly finance leasing, but straightforward leasing using the asset as security is a feature of the market.

A feature of finance leasing is that the lessor owns the asset. This is why a finance lease is sometimes likened to a secured loan. If the lessee doesn’t pay the rentals the lessor may be able to get its money by selling the asset, which it owns and does not need to repossess. How practical this is depends on the nature of the asset. Some assets are more readily realisable than others.

The theory is that a lessor who is secure may be prepared to provide finance at a lower cost to traders than other financiers would be prepared to do. A lender generally has to build something into the interest rate they charge to cover bad debts on their loan book. A lessor who is at less risk from bad debts may have less need to charge more and/or can make more profit from the deal.