What distinguishes interest charges in a secured loan from payments in a true lease?

Interest charges in a secured loan and payments in a true lease are fundamentally different, particularly in their nature and purpose. In a secured loan, interest is charged on the principal amount borrowed, which is the core aspect of the loan agreement. The borrower is required to repay not only the principal but also the interest, which is the cost of borrowing money. This interest is typically calculated based on the amount borrowed and the agreed-upon interest rate over the term of the loan.

In contrast, payments made in a true lease do not involve repaying a principal amount because a true lease is essentially a rental agreement for the use of an asset. Instead of paying interest on a borrowed sum, the lessee pays for the use of the asset for a specified period. These payments are categorized as lease payments, reflecting the cost associated with leasing rather than borrowing.

This distinction is important as it underlines the nature of the financial obligation in each scenario: secured loans involve borrowing with interest charges, while true leases focus on the payment for usage without creating an obligation to return a principal amount.