What is a finance lease?

Definition of a finance lease

An finance lease is a lease for the purchase of a new piece of equipment. Hire purchase is a type of finance lease.

If you’re leasing an asset and taking on all the risks and rewards of owning that asset while you’re leasing it, then the lease still counts as a finance lease even if you’re not going to own the asset at the end of the lease. Here's how to account for an asset that you’re leasing under a finance lease in FreeAgent.

If you’re leasing an asset but you’re not taking on the risks and rewards of owning it, that’s an operating lease, not a finance lease.

Example of a finance lease

If you buy a car on hire purchase, that’s a finance lease, because you’re taking on the risks and rewards of owning the car. It’s up to you to make sure the car is insured, taxed, and roadworthy and to pay for it to be serviced and repaired.

A finance lease shpould not be confused with an operating lease.

Got questions? Ask Emily!

FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.