PmtCalcHow the comparison works
Lease net cost = fees at signing + lease payments + purchase price at the end (if you buy) − equipment value (if you buy)
Loan net cost = down payment + loan fees + loan payments during the lease term + any loan balance left at the end − equipment value
Both sides are compared over the lease term. Lease payments are made at the start of each month and loan payments at the end, so each cash flow is discounted to today at your discount rate: what your cash earns or saves elsewhere. When you buy at lease end, the calculator also solves for the lease's implied interest rate, the rate at which the lease payments and purchase price repay the equipment price, so you can compare it directly with the loan rate.
Example
Equipment costs $50,000 and should be worth $10,000 after 5 years. A 60-month lease is $1,000 a month, returned at the end. A loan with 10% down at 8% for 60 months is $912.44 a month on $45,000. Before discounting, leasing costs $60,000 and buying nets $49,746 after counting the $10,000 you own. At a 5% discount rate, the lease costs $53,212 in today's dollars and the loan $45,559, so buying costs $7,653 less.
If the same lease has a $1 purchase option, its implied rate is 7.69% and leasing comes out $138 ahead, because you keep the equipment and pay no money down. A lease at $800 a month, returned at the end, costs $42,569 in today's dollars and beats the loan by $2,989. With a 36-month lease at $1,400 and a $25,000 value at month 36, the buy side pays off the remaining $20,174 loan balance and still comes out $15,617 ahead.
Leasing or buying equipment
A lease usually needs little or no money down and can include the purchase at the end. A $1-out (capital) lease is close to a loan, so compare its implied rate with loan offers. A fair-market-value lease has lower payments and suits equipment that becomes obsolete quickly, since you can return it. Buying costs more up front but you keep the equipment's resale value, which matters most for machinery that lasts. Taxes are left out because lease payments, depreciation and interest are handled differently for business taxes; a tax professional can tell you how each option affects yours. An SBA 7(a) loan can also be used to buy equipment; the SBA 7(a) loan calculator adds its guaranty fee. To size the loan side on its own, use the business loan calculator.
Frequently asked questions
Is it better to lease or buy equipment?
Buying usually costs less overall for equipment you will keep and that holds its value, because you own it at the end. Leasing can cost less when the equipment loses value fast, when you would return it, or when you want to keep cash free. Compare both in today's dollars with your own numbers.
What is a $1 buyout lease?
A $1-out lease lets you buy the equipment for $1 at the end of the term. It works much like a loan: you pay for nearly the whole cost through the payments and keep the equipment. Its implied interest rate is the fairest way to compare it with a loan.
What is a fair-market-value lease?
A fair-market-value (FMV) lease lets you return the equipment, renew, or buy it at its market value when the lease ends. Payments are lower than on a $1-out lease because the lessor keeps the residual value.
What discount rate should I use?
Use what your cash would otherwise earn or save, such as the return on your business savings or the rate on debt you could pay down. A higher discount rate favors options that delay payments, which usually helps leasing.
Sources
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