How do lease financing rates typically compare to traditional loans?

Lease financing rates typically are often higher than traditional loans. This is primarily due to the unique characteristics of lease financing. In lease agreements, the lessor retains ownership of the asset, which means they bear the risk associated with depreciation and potential obsolescence. Since the lender has less security compared to traditional loans, where the borrower typically owns the asset and could provide it as collateral, it leads to higher rates to compensate for that increased risk.

Additionally, lease agreements may include costs related to maintenance and insurance, which are sometimes bundled into the lease payments, making the overall financial arrangement different than that of a traditional loan. The financing structure in leases can involve tax considerations, where lease payments can be deductible as a business expense, which may not always offset the higher rates, but it's a common factor that influences the preference for leasing in some contexts.

Understanding these dynamics helps in recognizing why the rates associated with lease financing can be higher compared to traditional loans and the implications this has for budgeting and financial planning in a municipal context.