A finance lease agreement is a type of lease where a lessee (the person leasing the asset) makes regular payments to a lessor over a specific period of time for the use of an asset, typically a high-value item like a car or a piece of equipment. At the end of the lease term, there are three actions that can happen – the lessee can return the asset, extend the lease, or purchase the asset.
Returning the Asset
The most common action at the end of a finance lease agreement is for the lessee to return the asset to the lessor. This is typically done when the lessee no longer needs the asset or wants to upgrade to a newer model. When returning the asset, the lessee must ensure that the asset is in good condition and has not suffered any damage or excessive wear and tear beyond what is considered normal for the lease period. If the lessor determines that the asset has been damaged, the lessee may be charged additional fees to cover the cost of repair.
Extending the Lease
If the lessee still needs the asset but is not ready to purchase it outright, they may choose to extend the lease. This involves negotiating a new lease agreement with the lessor that extends the lease period for a set amount of time. Extension options can vary depending on the lessor and the asset being leased, but may include short-term extensions or the ability to renew the lease for several years. The lessee will typically need to pay fees to extend the lease, but these can be negotiated and may be lower than the cost of purchasing the asset outright.
Purchasing the Asset
The third option at the end of a finance lease agreement is to purchase the asset from the lessor. This gives the lessee ownership of the asset and the ability to use it as they see fit without any limitations from the lease agreement. The purchase price of the asset is typically determined by the lessor and will depend on a number of factors, including the original cost of the asset, the length of the lease, and the condition of the asset at the end of the lease period. If the lessee chooses to purchase the asset, they will need to pay the purchase price in full and take care of any associated paperwork, such as transferring ownership and obtaining insurance.
In conclusion, when a finance lease agreement comes to an end, the lessee has three options – returning the asset, extending the lease, or purchasing the asset. Each of these options has its own set of pros and cons, and the best option will depend on the lessee`s individual needs and circumstances. It`s important to carefully consider each option and weigh up the costs and benefits to make the right decision for your business.