What is the primary difference between a lease and a loan?

The primary distinction between a lease and a loan lies in the nature of the agreements regarding ownership and use of the asset. A lease is a contractual arrangement in which one party (the lessor) allows another party (the lessee) to use an asset, such as equipment or property, for a specified period in exchange for periodic payments. Importantly, the lessee does not obtain ownership of the asset; instead, they gain the right to use it during the lease term.

In contrast, a loan involves borrowing money to purchase an asset. When an individual takes out a loan, they receive the funds required to buy the asset outright, which means they become the owner of that asset immediately upon purchase. The borrower then repays the loan amount along with interest over time.

This essential difference underscores the functional use of leases and loans in financing; leases focus on providing access to assets without ownership, while loans facilitate the outright purchase of assets, transferring ownership to the borrower from the very beginning.