What does a lease refer to in finance?

A lease in finance refers to a long-term rental agreement, which typically involves the right to use an asset for a specified period while making regular payments, known as lease payments. Unlike short-term rental agreements, a lease often spans several years and can apply to various assets such as vehicles, machinery, or property. The lessee (the party renting the asset) does not own the asset but has the right to use it according to the terms outlined in the lease contract.

This arrangement can provide several benefits, including the conservation of capital, avoiding large initial expenses of purchasing assets, and potential tax advantages depending on the structure of the lease.

Understanding the distinction between a lease and other financial contracts, such as an agreement to purchase an asset or a type of investment contract, is crucial. The former involves ownership transfer upon payment completion, while the latter typically involves a financial instrument meant for investment purposes without direct use of physical assets.