What is Leasing? Definition, Types, and Benefits

What is leasing? – In general, leasing is a form of financing activities for capital goods or equipment in the form of option rights or without option rights that are utilized for customers within a predetermined period of time. Where payments are made in installments or installments.

Some experts also argue that leasing is a form of agreement entered into by people who own assets or goods with their customers. In this case, the owners of the assets will be referred to as lessors, while the customers are referred to as lessees. Later, the lessors will provide goods or capital products needed by the lessee to support production operations. Instead, the lessee must make payments to the lessors in installments or installments.

Meanwhile, according to the Decree of the Ministry of Finance Number 1169/KMK.01/1991, the definition of leasing or what is commonly referred to as leasing is a payment activity in the form of providing goods or capital for leasing. Where in it there are options or without option rights which are then utilized by customers within a certain period of time based on payments to be made in installments.

Based on the explanation above, it can be concluded that leasing has eight main elements, namely company financing, supply of goods or capital, payment within a certain period of time, there is an agreed residual value, there are voting rights or option rights, payment in installments, there are parties lessor, and there is the lessee party.

The definition of leasing is

Leasing is a financing activity in the form of providing goods or capital that can be carried out by anyone who needs it. Be it companies or individuals who use these items. Leasing activities generally have a certain period of time and the method of payment is also in installments or installments.

Payment by installments makes it easier for customers because they no longer need to prepare large amounts of money at one time. The amount of payment also depends on the amount of the cost of goods or capital and the chosen installment period.

In addition, there is another definition of the term leasing, which is an agreement that has been agreed upon by the owner of the capital with another party which is usually referred to as the customer who cooperates with them. After the agreement is made, then the customer will receive capital or goods and start paying installments until the agreed time.

Leasing is one method that is often relied on by the people of Indonesia. This is because the presence of leasing is very helpful for the community to be able to more easily buy goods and obtain the capital needed. For example, when buying electronic goods, vehicles, capital to build a business, and others.

History and Development of Leasing

Leasing is an activity that has existed for a long time. This activity began to appear in 2000 BC, where it was first practiced in Sumer. This is evidenced by the discovery of leasing documents which were blinded out of clay and contained leasing and all kinds of needs at that time. Such as livestock, water, daily equipment, and others. Leasing activities were then resumed and further evidence was found in the form of leasing institutions in Babylon in 400 BC. Leasing in ancient times was like today. Communities in Babylon have taken advantage of leasing activities to meet their needs. Starting from the soil, plant seeds, and tools needed for farming.

After that, leasing activities were followed by Egypt, Rome, Ancient Greece, and other countries. In modern times like today, new activities are present in the United States. In 1850, someone named Tom M. Clark was recorded as the first person in America to lease a train. From this, leasing then spread to all corners of the world.

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Leasing Types

Leasing is divided into five types based on the implementation process. The five types include:

1. Capital Leases

Capital lease is a type of company engaged in the leasing sector and originates from a financial institution. This type of leasing can usually serve customers who need freedom in terms of determining capital or goods with certain specifications. In use, the lessor will provide a number of funds to be used to pay for the goods needed by the supplier. Then it will be handed over to the lessee. After that, the lessor will receive a reward in the form of payment in installments or in installments within a mutually agreed period.

2. Operating Lease

Operating Lease is a type of leasing company in which the lessor will buy an item and then lease it to customers within an agreed timeframe. For this, the customer usually only needs to pay the rental fee for the goods. Meanwhile, the price and other costs will be borne by the lessor.

3. Sales Type Lease

A sales lease is a type of leasing that is generally carried out by companies operating in the industrial sector. Then they will sell goods lease from the results of the products they make. There are two types of income that can be recognized, the first is income from the sale of goods. Then the second is income that comes from interest on spending over a certain period of time.

4. Leverage Leases

Leverage is a type of leasing company that involves a third party. That means, the lessor will not pay 100% for the leasing object, but they only need to pay 20% to 40%. The rest will be borne directly by third parties.

5. Cross Border Leases

It is a type of leasing company carried out by interstates. That means, the lessor and the lessee are not in the same country. However, both are in different countries. Generally, this type of leasing only makes transactions for goods that have a large nominal value. As well as Boeing or Airbus aircraft products.

Benefits and Advantages of Leasing

Presenting goods and capital procurement activities on a leasing basis will certainly make it easier for the company to obtain the goods it needs. As for some of the benefits and advantages that will be obtained by the company for carrying out leasing activities, including:

1. Be Flexible

The structural framework in the leasing can be adjusted according to the needs of the lessee. So that the leasing period and also the nominal to be paid can be adjusted to the customer’s financial condition.

2. No Guarantee Required

The legal title to the assets under the lease and the appropriate lease payments for the assets can be used as security for the lease.

3. Capital Saving

The leasing agency will usually provide a budget of 100% for customers. So that the lessee can use these funds for other needs with the aim of increasing the company’s productivity.

4. Fast Service

In general, the financing procedure will take a relatively short time. Starting from the submission system to its realization. With this convenience, it can increase time efficiency for carrying out company activities. So that the company can also be more productive.

5. Avoid Inflation

In leasing activities, customers can avoid inflation because payments will be made in accordance with the agreed financial unit.

6. Protected By Law

Here, the lessor and also the lessee will get legal certainty because there are regulations that have previously been agreed upon. Where these regulations cannot be canceled even though they are experiencing difficult financial conditions.

7. How to Acquire Assets

Leasing parties are often used as one of the main choices when a company wants to modernize to increase productivity but has difficulty in terms of funding.

Terms in leasing and their meanings

There are several terms that are often used in leasing transactions. The following are terms in leasing and their explanations:

a. Lease: That is a lease contract for the utilization of assets with the amount of rent paid within a certain period of time.
b. Lessee: Namely the customer or customer which is usually in the form of an individual or company. Where they take advantage of capital from financing the leasing party.
c. Lessor: Namely the party that owns assets or capital goods, which will then be leased.
d. Lease Term: This is the lease term which is absolute and irrevocable.
e. Residual Value: This is the value of the leased asset that may be applied at the end of the lease period.

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Leasing Function Is

It should be understood that actually the function of leasing is almost the same as that of a bank. Where leasing also provides medium-scale product financing. The difference lies only in the form of the loan. Usually conventional banks only provide loans in the form of money.

While leasing can provide loans in the form of goods which later payments will be made in installments. For example, regarding the purchase of a motorcycle. Without leasing, we have to buy it in cash and it will definitely be very burdensome for people who don’t have large amounts of money at one time. Especially for people who are just a laborer and need years to buy motorbikes in cash.

Therefore, leasing is here to provide an opportunity for people to be able to own a motorbike without having to pay 100 percent in cash. Usually we only need to issue a down payment for the initial payment. The amount of down payment varies. Where later the shortfall of the payment can be paid in installments over a predetermined and agreed period.

The Purpose of Leasing Is

In general, the purpose of leasing is to make it easy for people to own goods or capital, even though these goods have a high value. In addition, the leasing party will also benefit from the business. Usually they will benefit from credit interest. If the desired motorcycle price has a normal price of 17 million. So we have to pay for the motorbike at a higher price than the initial price on the leasing party. Because, in the installments there will be credit interest.

Examples of Leasing Companies in Indonesia

There are quite a lot of leasing companies in Indonesia. Where the company already has a variety of services offered. The following are leasing companies currently in Indonesia, namely PT BCA Finance, PT Federal International Finance (FIF), PT Adira Dinamika Multi Finance, Tbk. PT Oto Multi Artha, PT Summit Oto Finance, PT Wahana Ottomira Multiartha (WOM), and many others.

The difference between Leasing and Credit

When viewed from the definition, leasing and credit already look different in outline. The difference between the two is very clear, because one company only has a role to rent and the other only to buy. The following is a complete explanation of the difference between leasing and credit.

1. Payment Deadline

Leasing and credit do have payment deadlines. However, the specified time limit is not the same between leasing and credit. In leasing, the payment deadline is determined directly by the lessor and usually the time period given is quite long. Depends on the ability of the lessor to pay for the lease. Meanwhile, for credit, usually the time limit given is more limited or shorter. The amount of money and the term of payment is the result of the agreement of both parties. However, the time limit for lredit generally has a maximum of 5 years.

2. Ownership of Goods

If on leasing, the ownership of the goods remains with the lessor. So that when the customer cannot pay off the payment according to the agreed time, the item will be withdrawn by the lessor. Whereas in credit, for example there is a case where the customer is late in paying the agreed installments, a penalty or deferred interest will be imposed in the following month. However, if by maturity the customer has not paid the installment, then the goods that have been purchased will be confiscated by the creditor and the previous installment money will not be returned.

3. Users or Clients

In general, those using leasing are industries that are capital intensive. For example, companies engaged in the field of aircraft fleet, procurement of heavy equipment, procurement of production machines, to leasing vehicles. As for credit, it is generally used by individuals or individuals to buy certain goods. For example electronic goods, vehicles, and others.

That is an explanation of leasing and its types, brief history, benefits and advantages. For Sinaumed’s who will use the leasing system, make sure you have chosen a trusted and official leasing company. So that the payment system and interest are clear and not too burdensome.

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