Equipment Lease vs Loan: Which Is Better?
Understand the key differences between leasing and buying equipment with a loan. Make the right choice for your business with our comprehensive comparison.
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| Factor | Equipment Lease | Equipment Loan |
|---|---|---|
| Ownership | No (unless buyout option) | Yes (after payoff) |
| Monthly Payments | Lower | Higher |
| Down Payment | Usually 0% | 10-20% typical |
| Tax Benefits | 100% payment deductible | Section 179 + interest deduction |
| Balance Sheet | Off-balance sheet (FMV) | On-balance sheet |
| Flexibility | Easy upgrades | Full control |
| Total Cost | Higher (if buying out) | Lower (long-term) |
Equipment Lease
Rent equipment with flexibility to upgrade
Advantages
- • Lower monthly payments preserve cash flow
- • No or minimal down payment required
- • 100% of lease payments are tax-deductible
- • Easy to upgrade to newer equipment at lease end
- • Off-balance sheet financing (FMV leases)
- • Fixed payment protects against inflation
- • Maintenance often included
- • Easier approval than loans
Disadvantages
- • You don't own the equipment
- • Higher total cost if buying out at end
- • Locked into term (early termination fees)
- • Mileage or usage restrictions possible
- • No equity buildup
- • May have wear-and-tear charges at end
Best For:
- ✓ Technology that becomes obsolete quickly
- ✓ Businesses wanting to preserve cash
- ✓ Seasonal businesses needing flexibility
- ✓ Equipment you'll replace in 3-5 years
Equipment Loan
Buy equipment and build equity
Advantages
- • You own the equipment outright
- • Build equity as you pay down loan
- • Section 179 tax deduction (up to $1.25M)
- • Lower total cost over time
- • Can use equipment as collateral
- • No usage restrictions
- • Interest is tax-deductible
- • Equipment has resale value
Disadvantages
- • Higher monthly payments
- • Usually requires 10-20% down payment
- • On-balance sheet debt affects ratios
- • Responsible for maintenance
- • Equipment depreciates over time
- • Stuck with obsolete equipment
Best For:
- ✓ Long-lasting equipment (10+ years)
- ✓ Businesses with strong cash flow
- ✓ Equipment that holds value well
- ✓ When you want maximum tax deductions
How to Decide
Choose Leasing If...
- You need to preserve cash flow for operations or growth
- The equipment becomes obsolete quickly (computers, medical tech, etc.)
- You want to upgrade equipment every few years
- You prefer off-balance sheet financing
- You have seasonal business and need flexibility
Choose a Loan If...
- You want to own the equipment and build equity
- The equipment has a long useful life (7+ years)
- You want maximum tax deductions with Section 179
- You have cash available for a down payment
- You want lower total cost over the equipment's life
Ready to Compare Your Options?
Use our free Lease vs Buy calculator to see the actual numbers for your situation.