Difference between financing and leasing

When equipment is financed over a period of time, like 36 months, a down payment is often required and the remaining principal balance is amortized over the term. This monthly amortized amount is added to the incremental interest to make up the monthly payment. When the last payment is made, the balance will then have been paid in full. With the balance paid in full, title to the asset is conveyed to the borrower.

A lease is structured much the same way as term financing. The key difference is that, most often, something less than the full price of the asset is used to determine the monthly principal amount. When this lesser amount is added to the incremental interest, the payment will often be less than standard financing. Since the amortized amount of the lease doesn't pay off the balance, there is a balance remaining, which is called the "residual."

When the lease expires, the asset is returned to the leasor, unless the leasee wants to purchase it, typically for the residual.