6 Things You Need To Know About Leasing Equipment
Ownership is a fairly straightforward thing to understand. You simply exchange money for an item, and it is yours to keep. Against that backdrop, leasing equipment is kind of a strange beast, with a language and logic that can be unfamiliar to many.
If you’re looking at leasing equipment for the first time, here are six things you need to consider in advance.
Table of Contents
1. The Terminology
If you’re looking at leases, you’re probably going to encounter some terms that sound weird when spoken and look even strange written down. For example, a lessor is the owner of the asset, while the lessee is the person paying money to use it. You’ll also want to know the difference between a Fair Market Value lease and a buyout lease. This article on the basics of equipment financing explains those concepts well.
There are far more terms than we can cover here, but if you encounter any terms you aren’t familiar with, make sure you look them up or at least ask the lessor what they mean in the context of the lease. Some companies provide offer helpful FAQs for prospective customers.
2. Who is Responsible for the Equipment?
One of the most important details you’ll want to lock down are questions of ownership. Traditionally, a lease entailed exchanging money with an asset’s owner in exchange for the right to use it for the length of the contract. What didn’t happen, however, was a transfer of ownership.
That meant that the lessor was responsible for the reasonable upkeep and maintenance of their property. Think of the arrangement you might have with your landlord.
You can still find plenty of those kinds of types of leases, but be aware that many of them are structured differently now. Leases that are designed to facilitate ownership like buyout leases and equipment financing agreements may transfer responsibility for maintaining the product to the lessee, so be sure to factor those potential costs into your calculation.
3. Are You Looking to Own or Return the Equipment?
A lease is a temporary arrangement. When the lease’s term is up, you’ll have to make the important decision as to whether to buy the equipment from the lessor, extend your lease, or return the equipment.
What you may not realize is that you should probably make that decision before you sign the lease rather than waiting until it’s up. That’s because there are different kinds of leases. A $1 buyout lease, for example, is designed to facilitate ownership by spreading the cost of the equipment out over the length of the term. A fair market value lease, on the other hand, is closer to a rental agreement: your monthly payments will be lower, but the cost of buying the equipment at the end of the term–should you choose to do so–will be higher.
4. How Quickly Does the Equipment Depreciate in Value?
If you aren’t sure whether you ultimately want to own or return the equipment you lease, an important factor to consider is how quickly the equipment will become obsolete or lose value.
A vehicle, for example, might retain its utility for a decade or more, while a computer will be showing its age by the end of your leasing term. An asset that loses its utility and can’t easily be resold may not be worth owning long-term.
5. Do You Need to Make a Downpayment?
One of the bigger advantages leases offer over equipment loans is that you don’t have to come up with a percentage of the equipment’s costs (most equipment loans won’t cover 100 percent).
That doesn’t necessarily mean you’ll be completely avoiding upfront costs, though. You can safely expect to have to make the first month’s payment right away, although many lessors will ask for the last month’s payment as well.
Additionally, some equipment lessors may also charge a service fee in addition to the actual month leasing costs.
6. The Cost Relative to Buying
Leases typically are more expensive (over the long run) than either buying the product outright or buying it with an equipment loan.
That said, there are factors that make leasing more financially prudent. If, for example, the lessor is responsible for maintenance, you are likely to save some money over the length of the term. Also, depending on the terms of your lease, you may be able to write-off payments off your taxes.