Capital leases are a particular form of lease agreement that allows an individual or company to enter into a relationship with a supplier in which there is an excellent chance that the lessee will wish to acquire full ownership of the product at the end of the lease agreement. Typically, there are specific conditions that must exist and are documented within the terms of the lease.
A capital lease is sometimes referred to as a conditional sales contract. The advantage to the lessee or buyer is the fact that the product can be paid for over time, without the need for taking out a loan to handle the transaction. Along with making it possible for the lessee to acquire and begin to enjoy the product immediately, a capital lease also usually includes some stipulations for terminating the agreement early. Those clauses help to provide the lessor with a reasonable level of protection, in the event that the lessee has a change of heart after the agreement has been in place for only a short time.
Like many leases, the capital lease is entered into with expectations on the part of everyone concerned. The lessee anticipates being able to enjoy the product, pay a fixed number of payments on an agreed upon schedule, and have the option of executing a final purchase for the product once the payments have been settled in full. The lessor benefits from the capital lease by placing a product with a customer, receiving a regular fee for that product, and having a reasonable expectation of ultimately selling the product.
While some of the exact structure of a capital lease will vary from one situation to another, there are a few elements that seem to be included in most of these types of leases. First, there is usually some process of depreciation built into the agreement. This helps to ensure that at the end of the capital lease, the lessee will pay no more than a fair market value to gain full ownership of the product. Second, the lessor extends a certain amount of credit for the lease payments that were made, which are applied to the final sale price for the item. In some cases, the actual execution of these two provisions results in the lessee paying only a small sum after the credit is extended.
