Equipment Loans vs. Equipment Leasing

Many types of equipment loans and leases are very similar. Yet there appears to be a common belief that these are very different types of financing. Some people believe that one is better than the other or less expensive than the other. Let's explore some of the differences and similarities. The main difference between an equipment loan and equipment lease is that with the loan title to the equipment rests with the borrower and the lender secures a lien on the equipment. In an equipment lease the lessor (lender) owns the equipment and the lessee (customer) leases the equipment for a specific period. However in many capital leases the title to the equipment may pass to the lessee for as little as $1.00. This is called a "lease purchase". A loan is often structured with payments "in arrears" and with a first payment due 30 days from the start of the loan. Equipment leases are usually structured with payments in advance. It is a common practice for lessors to collect "first and last" payments in advance at the beginning of a lease, although a lease may be structured with just one payment in advance or can be structured with payments in arrears. In many types of loans, especially bank loans, the lender asks the customer to make a down payment. This is because most bank lenders are seeking to "collateralize" their loan. Most equipment leases offer 100% financing although some lessors require down payments based on credit risk parameters. While there can be different accounting and tax treatments for loans and leases borrowers and lessees should obtain advice from an accounting or tax professional regarding specific treatment of their loan or lease. Equipment loans sometimes are presented with requirements and terms such as down payments, annual fees, documentation fees, "points", compensating balances, restrictive covenants or floating rates. All of these and any other requirements should be considered carefully for the impact to the overall payments or interest paid. Equipment leases sometimes require advance payments, deposits, end of term options or obligations, documentation fees, or renewal fees or "auto-renewal" conditions. Lessees should consider the impact of any such requirements and the impact on the rate or total amount paid. One of the best ways to compare loans to loans, leases to leases or leases to loans is to compare the total of payments, any down payment, end of term payments or obligations and any fees and consider the total amount paid over the term of the loan or lease. Don't automatically assume a loan or a lease is less expensive. And, as with everything remember to negotiate with your lender or lessor. In summary comparison shopping and negotiating for your best deal will serve you well. Always investigate any organization and be sure they are established and reputable. If a proposal appears "too good to be true" then it probably is.