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May

Equipment Financing vs. Leasing: What’s the Difference?

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If you are thinking of taking out a truck loan, then you probably have some questions concerning the differences between equipment financing and leasing. The biggest difference between leasing and equipment financing is in the ownership.

Difference between financing and leasing

That is, when you lease a piece of equipment, then a vendor will allow you to rent it in exchange for monthly payments. This means you will not own the asset during the duration of your lease.

Conversely, equipment financing serves as a collateralized loan that will provide you with the option to purchase the piece of equipment outright. In other words, once the loan has been fully repaid—according to the stipulated terms—you will be the full owner of the equipment and can use it in perpetuity or sell it.

Below, we will go into greater detail about the differences between equipment financing and leasing, so you will be able to make an informed decision before you take out a truck loan.

What is an equipment lease?

When you take on an equipment lease, you will not be the outright owner of the asset. Instead, your lender will purchase the equipment from a vendor and then rent it out to you in exchange for monthly payments. Then, once your lease ends, you will have the option to return the equipment, buy it outright, or renew your lease.

Additionally, equipment leases can be further divided into two categories: capital and operating leases. Operating leases will provide the business owner with the option to own the asset after the term of their loan has ended. The business owner will need to pay its then fair market value, which is the reason why operating leases are sometimes referred to as “fair market value leases.”

As for capital leases, they have higher monthly payments than their operating lease counterparts, and they are structured very similarly to a loan. However, they differ in the sense that the lease doesn’t appear on your balance sheet during your lease term.

Then, once the lease ends, you will have the option to purchase the asset for a nominal price, such as 10% of the purchase price, or $1. The 10% option and $1 buyout lease are very popular examples in today’s market.

We should also note that the pros and cons of equipment financing vs. leasing, as well as the amount you will pay per month, will vacillate greatly depending on the equipment lease type that you choose. For instance, certain equipment leases are indistinguishable from equipment financing.

What is equipment financing?

Equipment financing is also known as an equipment loan and consists of your lender fronting you the capital needed to pay for the purchase of a given asset. What you purchase will also determine how much capital will be fronted, as your lender may be willing to lend you all, or at least most, of the capital needed. This depends on what you want to buy, as well as what the total value of the asset is.

Hence, you will be required to pay down the loan and make all of the necessary interest payments over the duration of your term. Then, once the loan has been fully paid off and you have adhered to all of its terms, you will be rewarded for your efforts by being the full owner of the equipment.

Pros and Cons of Equipment Leasing

The biggest advantage of equipment leasing is that you will not be required to put down any collateral, such as your home or car, to qualify for equipment leasing. In fact, you’ll also not be required to place a down payment either.

Hence, you will not have to worry about risking any of your personal or business assets to qualify. You will also be able to keep quite a bit of your cash, which can be used to finance other business endeavours.

As for the cons, the biggest downside is cost. That is, while you won’t have to pay any interest every month, as a lease is not a loan, your lender will effectively bake an interest rate into the seemingly flat amount that you need to pay each month. This is how equipment leasing companies make a profit.

Most lenders will also determine the cost of the equipment based on the lease’s length, as well as how poorly or well the asset retains value. Thus, depending on where the lender prices your payments, you may end up having to pay significantly more over your lease vis-a-vis an equipment loan.

Pros and Cons of Equipment Financing

The biggest pro of equipment financing is that qualifying is easier, as the lender can seize the asset that they are financing and then liquidate it to recoup lost funds if the borrower defaults on their payments. Furthermore, equipment financing tends to cost less than equipment leasing, and also usually requires no collateral, as it tends to be self-secured.

As for cons, you may be required to place a down payment in order to qualify, and you may also be “stuck” with the asset. Hence, you will need to make sure that the equipment will retain its value at the end of your term. Otherwise, you’ll be stuck with a depreciating or obsolete asset that you will need to pay to replace.

Summation of the Differences

In sum, an equipment lease allows you to pay for the utilization of the asset for the duration of your lease and not necessarily for the ownership of the asset. As for an equipment loan, it will help you pay for a portion of the asset outright.

However, similar to a conventional small business loan, you’ll still be legally required to pay back your lender for what you’ve borrowed, and you will have to make all of the necessary interest payments as well.

Put another way, you can think of an equipment loan as buying a home, while an equipment lease is similar to renting out an apartment. If you would like to procure a truck loan, then please visit Truck Loan Center at our website, or call us at 1-866-230-0094.

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