Equipment Loan vs. Equipment Lease: Which Is Right for Your Business?

Own or Lease? The Fundamental Question

When your business needs equipment—whether it's a delivery truck, manufacturing machinery, medical device, or construction equipment—you face a fundamental choice: should you finance a purchase (and own the equipment) or lease it (and essentially rent it)?

Neither option is universally better. The right choice depends on your business situation, the type of equipment, your cash flow, and your long-term plans. Understanding the differences helps you make a financially sound decision.

Equipment Loans: Path to Ownership

An equipment loan works like a car loan—you borrow money to purchase equipment, make regular payments over a set term, and own the equipment outright when the loan is paid off.

The equipment itself serves as collateral, which typically makes approval easier than unsecured loans. Loan terms usually range from 2-7 years, and interest rates vary from 6-20% depending on credit and equipment type.

Equipment Leases: Flexibility Without Ownership

With a lease, you make regular payments to use the equipment, but you don't own it. At the end of the lease term, you typically have options: return the equipment, purchase it, or lease newer equipment.

Leasing provides access to equipment with lower monthly payments than loans, but you don't build equity. Several lease types exist, each with different characteristics.

Types of Equipment Leases

Several lease structures exist, each with different terms and outcomes:

Cost Comparison

Total cost depends on many factors, but here's a general comparison:

Tax Implications

Tax treatment differs significantly between loans and leases, potentially impacting your decision.

• Equipment loans — You own the equipment and can claim depreciation (including Section 179 and bonus depreciation), plus deduct interest payments
• Operating leases — Lease payments are typically fully deductible as business expenses
• Capital leases — Treated similarly to ownership for tax purposes; depreciation applies
• Section 179 — Allows immediate deduction of equipment purchase price (up to limits)

When Equipment Loans Make Sense

Purchasing equipment with a loan works best when:

• You will use the equipment for its full useful life
• The equipment holds value well and will not become obsolete quickly
• You want to build equity and own an asset
• Section 179 tax benefits are valuable to your situation
• You prefer predictable costs without end-of-lease decisions
• You plan to use the equipment as collateral for future financing

When Leasing Makes Sense

Leasing equipment works best when:

• Technology changes rapidly and you want to upgrade regularly
• You need to preserve capital for other uses
• Lower monthly payments are more important than total cost
• You are uncertain about long-term equipment needs
• Your industry requires the latest equipment for competitive reasons
• The equipment has poor resale value

Industry-Specific Considerations

Different industries tend to favor different approaches:

Hidden Costs to Consider

Both options have costs beyond the monthly payment:

• Loans — Down payment, maintenance responsibility, eventual disposal costs
• Leases — Excess usage charges, wear-and-tear charges, early termination penalties
• Both — Insurance requirements, property taxes (may be included in lease)

The Impact of Equipment Condition

For new equipment, both loans and leases are readily available. For used equipment, options differ.

Loans work well for quality used equipment—you can often get favorable terms for equipment that's 2-5 years old. Leases for used equipment are less common and may have less favorable terms.

Qualification Differences

Qualification requirements are generally similar, but some differences exist:

End-of-Term Considerations

Think about what happens when the term ends:

• Loan payoff — You own the equipment free and clear; use it, sell it, or trade it
• Operating lease end — Return equipment; may face charges for excess wear/use
• Buyout lease end — Pay the buyout amount to own equipment
• Fair market value lease end — Negotiate purchase price or return

Questions to Guide Your Decision

Consider these questions when choosing between a loan and lease:

• How long will this equipment remain useful to my business?
• Does this type of equipment become obsolete or maintain value?
• What is more important: lower monthly payments or building equity?
• How would Section 179 deduction impact my tax situation?
• Do I need to upgrade to newer models regularly?
• What is my cash position — can I make a down payment?
• Am I comfortable with end-of-lease obligations and potential charges?

Making Your Decision

For most businesses purchasing equipment they'll use for its full useful life, an equipment loan typically provides better value through ownership, equity building, and Section 179 benefits.

Leasing works best for equipment that becomes obsolete quickly, when preserving capital is paramount, or when you need flexibility to upgrade regularly. Run the numbers for your specific situation, including tax implications, before deciding.