Combination Leases: Definition, Advantages and Disadvantages, What It Is, Agreement

Leasing is a common way of financing the purchase of an asset – such as a car, piece of equipment, or property – in which the lessee pays for the use of the asset over an agreed-upon time.

A combination lease is one of the most common types of leasing arrangements. It offers a combination of basic types of leasing, such as operating lease and capital lease to provide a unique solution for the customer’s needs.

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Table of Contents

What is a Combination Lease?

Combination leases combine features from capital and operating leasing. These customizable plans are perfect for any individual looking to maximize their financial options.

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As an example, a capital lease that includes a cancellation clause is one type of combination lease—this feature normally isn’t found in regular operating leases! With their versatility and convenience, combination leases make financing easy and affordable.

In simple words, a combination lease is a type of agreement that combines features from both capital and operating leases, allowing customers to customize their financial options for their individual needs.

This allows customers to benefit from the flexibility of an operating lease with the tax advantages of a capital lease—all in one convenient package.

How Combination Leases Work

Before signing a combination lease, it’s important to understand how they work and what features are available. Combination leases are a combination of capital and operating lease, which means they include features from both.

Capital lease: This usually involves a long-term commitment, with the lessee owning the asset at the end of the lease.

Operating lease: A short-term agreement in which the lessor owns and is responsible for maintaining the asset during the lease period.

Now when it comes to combination leases, you can mix and match features from both leasing types. That means you can have a long-term commitment, but also include a cancellation clause as seen in operating leases.

This means the customer can get the benefits of both leasing types, such as tax advantages and flexibility.

Benefits of Combination Leases

Combination leases are becoming increasingly popular due to their flexibility and convenience, here are a few of the biggest benefits they offer

Customizable: Customers can easily customize their lease to fit their specific needs.
Tax Benefits: Combination leases offer many of the same tax benefits as capital leases, including deductions on depreciation and interest costs.
Lower Payments: Because combination leases are typically a mix of both leasing types, customers can take advantage of lower payments over time.
Flexible Cancellation: Combination leases often include flexible cancellation clauses, giving customers the option to terminate their lease if necessary.

Downsides of Combination Leases

Although combination leases can be beneficial in many cases, there are also some potential downsides to consider

Complexity: Combining features from both capital and operating leases can make these agreements complex and difficult to understand.
Cost: Since combination leases offer so many customizable options, they tend to be more expensive than traditional operating or capital leases.
Risk: The long-term commitment of a combination lease carries more risk for the customer, as they are responsible for any remaining payments if they decide to cancel the agreement early.

Conclusion

Overall, combination leases offer a great deal of flexibility and convenience—but it’s important to understand the potential downsides before signing the agreement. By assessing both the benefits and drawbacks of a combination lease, customers can make an informed decision that’s right for their individual needs.