Chapter 21, Problem 1CQ

Leasing vs. Borrowing What are the key differences between leasing and borrowing? Are they perfect substitutes?

Summary Introduction

To determine: The difference between the leasing and borrowing and whether they are perfect substitutes.

Introduction:

Leasing is a contract between the two party, lender and tenant for the specified period in which lender receives the payment from the tenant in exchange of the land.

Borrowing:

Borrowing is a king of the loan, which is received by the bank and other institution for a specified period. After a period, the amount of the borrowing is paid with the interest.

Answer to Problem 1CQ

Leasing and borrowing are not perfect substitutes of each other because there are some key differences between the leasing and borrowing.

Explanation of Solution

Both of these are not perfect substitutes of each other:

• Lease payment is fully tax deductible, while borrowing interest portion is deductible.
• Leasing is the deal between the lender and tenant while in the borrowing the name of the parties are borrower and lender.
• In the leasing contract, contract is done for the land between the parties while in the borrowing, the contract is for the money.

Conclusion

Hence, these are the some difference between the leasing and borrowing.