Leasing: Leasing vs. Bank Loans

There are several important differences between leasing and the classic bank loan. They are best viewed in terms of individual and business clients. Supposing the client is an individual client buying a car, the basic difference between leasing and a loan relates to cost. In Bosnia and Herzegovina, financing services by banks, microcredit organizations, and insurance companies are exempt from VAT. Leasing companies have to charge VAT on their interest. This means that individuals bear both the cost of the interest and of VAT on the interest. Another difference is that, when leasing, the beneficiary has to invest resources of their own as a down-payment, which it is not the case with bank loans.

With leasing, the individual also benefits from the simple approval procedure, with no need for additional guarantors. The opportunity cost is reflected in the VAT on interest and the comprehensive vehicle insurance usually mandatory during the lease term.

The basic differences are not the same for businesses operating in the VAT system. Depending on the leased asset, legal entities may be able to recover VAT, so that VAT on the interest cannot be considered a cost. What assets companies can recover VAT on differs from country to country. In Bosnia and Herzegovina, companies are entitled to VAT back on fixed assets used directly in performing their activities: equipment and machinery, trucks, vans, etc. Cars are an exception from this rule.

Lease financing is very similar to bank loans (except for ownership over the asset). The choice between these options will depend on interest rates and collateral requirements (banks are usually more demanding in assessing credit rating and require additional security in the form of mortgages, etc.).

Financing by operating lease offers additional advantages, including making the company balance sheets look ‘better,' from the position of long-term debt (borrowings are not recorded in the balance sheet). Moreover, the lessee is only using the leased asset, while the risk associated with it is transferred to the leasing company (risk of obsolescence, etc.).