What is the meaning of Capital Lease?

A Capital Lease means a lease agreement or a contract in which the ownership rights of the asset are transferred to the lessee after the completion of the lease period. These are usually done for long-term and cannot be cancelled. The lessee has the option of bargaining at the time of the sale of the asset i.e. at the end of the lease period. This can help the lessee to get the discounted price lower than the fair market value.

The current value of the minimum lease payments is generally equal to the fair value of the leased asset. The term of the lease should be in sync with the useful economic value of the asset. In case of cancellation of lease for any reason, the loss is borne by the lessee. The lessee thus becomes the owner of the leased asset after the expiry of the term of the lease. He/she can also claim depreciation and finance charges.

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