Why might interest costs of leases be higher than those of loans?

The interest costs of leases can be higher than those of loans primarily due to the perceived risk by lenders. In a lease agreement, the lessor retains ownership of the asset, which means that if the lessee defaults, the lessor has the risk of recovering the asset. This potential for loss makes lenders perceive leasing as a riskier proposition compared to traditional loans, where the borrower has ownership of the asset. Consequently, lenders may set higher interest rates on leases to compensate for this added risk.

Additionally, factors such as the creditworthiness of the lessee and the residual value of the leased asset can further influence the perceived risk, leading to higher interest expenses associated with leases compared to loans. This risk-factor dynamic is key in understanding the cost structure of leasing agreements versus loan agreements.