Explanation of a Leveraged Lease

A leveraged lease is an agreement where the lessor finances the lease by taking a loan from a lender. The party leasing the asset pays the lessor monthly. The lessor, in turn, remits the payments to the financing company. This allows the lessor to provide a lease and profit from the lease even if the individual leasing the asset does not have the income to obtain the lease outright. In the perfect leveraged lease, all parties benefit from the arrangement.

Benefit to the Asset Holder

The individual purchasing the asset obtains low cost financing. This financing comes directly from the lessor. The borrower never has to pay the financing company. Lease payments will be remitted to the financing company without the individual borrower ever taking part in that exchange. If the lessor cannot continue to remit payments to the financing company due to financial problems it may be having, the individual will always have the right to take over the lease and continue to make payments. The biggest benefit to the individual, though, is the opportunity to lease the asset even though they do not have the immediate cash available for purchase. 

Benefit to the Lessor

The lessor needs to sell assets in order to sustain a business profit. However, particularly if the lessor is dealing with expensive assets like real estate, it can be challenging to find borrowers with the cash on hand to make a direct purchase. Offering financing expands the lessor's potential clientele. If the lessor were to directly enter the financing business, though, the lessor would need to obtain new licensing and would be subject to new laws. By acting as the middle man between the financing company and the client, the lessor gains the benefit of offering financing, without having to directly become a finance company.

Benefit to the Finance Company

Even though the finance company is leasing to another company and not directly to a client, the finance company can still charge an interest rate. This rate will result in a profit. The finance company earns this profit without ever having to actively market services or engage with the customer. Instead, the finance company can secure large, corporate clients, such as automobile dealers or apartment buildings, and only deal on this "wholesale" loan market. One client can bring in a handful of financing agreements to a lender. The lessor can charge a slight markup on the lender's interest rate, profiting from the financing as well.

Obtaining a Leveraged Lease

If you are shopping for an asset you cannot afford out right, ask the seller about leasing or financing options. Even if the company does not provide these options directly, it may partner with a separate financing company to offer lease arrangements to potential clients. Of course, leveraged leases use a middle-man. This means the cost can be driven up quite a bit, and the result can be high costs for the consumer. Compare these options with options to take a personal loan directly from a lender to see which option would be a better fir for your needs.

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