Daniel Duque
By: daniel_duque
Read in 16 minutes

Lease vs. Loan: Differences Between Finance and Lease

When deciding between a lease and a loan for new equipment, it’s important to know the differences.

A lease allows you to rent machinery for a certain time, while a loan borrows money from a lender to make a purchase.

As this is one of the biggest decisions you have to make as a business owner, in this blog post, we will break down those differences for you, the pros and cons, and how to choose each one.

Table of Contents
1. Differences between lease and loan
2. What is leasing?
3. Types of leases
4. Pros and cons of a lease
5. Common uses for a lease
6. What is a loan?
7. Types of loans
8. Pros and cons of loans
9. Common uses for a loan
10. How to choose between a loan or a lease
11. How do you know if a loan is right for you?
12. Is it better to finance or lease?
13. FAQs

Differences Between Lease and Loan

Between a loan vs. a lease are differences and similarities. Some of them are:

A Lease

  • The property belongs to the financial entities up to the end of the contract.
  • No obligation to become an owner.
  • Not a rental agreement.

A Loan

  • You must repay the money in full.
  • You can use it as a down payment for an asset purchase.
  • It helps you build your credit history.

Both Loans and Leases

  • Requires monthly payments.
  • An interest rate is charged.
  • You might have to acquire an insurance policy.

What is the Difference Between Leasing and Financing

In a lease, the property belongs to financial entities up to the end of the contract. With financing, you must repay the money in full in funding.

With that, you have to pay the entire purchase price of an asset, and with a lease, you don’t have an obligation to become an owner.

For example, you must pay the vehicle in a monthly lease payment for car leasing, but if you get an auto loan, the car will be yours.

How Loans and Leases Differ

Amounts financed, extra costs, collateral, monthly payments, closing costs, rates, and fees can all vary depending on whether you’re taking out a loan or leasing a machine.

Here’s a quick rundown of how leasing vs. buying (with the help of a loan) differ:

LoansLeases
RatesLoans typically have higher interest rates than leases. This is because, with a loan, you’re borrowing the entire purchase price of the machinery.You only pay for the machinery’s depreciation over the lease term with a lease.
Amount FinancedWith a loan, you can usually finance the entire purchase price of the machinery.You can only finance the machinery’s depreciation over the lease term with a lease.
Extra CostsYou may have to pay for registration and insurance with a loan.With a lease, these costs are usually included in your monthly payment.
CollateralCollateral is another key difference between loans and leases. With a loan, the machine itself is usually used as collateral. If you default on your loan, the lender can repossess your machine.In a lease, there is no collateral involved. If you default on your lease, the worst that can happen is that you’ll have to give up the machine.
Monthly PaymentsYour monthly payment will usually be higher with a loan than with a lease. This is because you’re paying off the entire purchase price of the machine.With a lease, your monthly payment will be lower. This is because you only pay for the machinery’s depreciation over the lease term.
Closing Costs and FeesYou may have to pay for things like origination fees and closing costs with a loan.With a lease, these costs are usually included in your monthly payment.

Apply for a business loan today

What is Leasing?

A lease is a contract that allows you to use an asset in exchange for a monthly fee without a down payment.

In leasing, the protagonist of the transaction is an asset (it can be machinery, equipment, or even a building) and not cash (like with a loan).

The parties involved in a leasing agreement are:

  • the financial institution, which is the owner of the asset, they’re called the lessor
  • the person that wants to use the asset is called the lessee

#CaminoTip
For instance, consider your needs when thinking about financing vs. loan. A machinery loan allows you to have the vehicle outright, and you’ll be able to repay it over a period of time, usually two to five years.

How Leasing Works

The lessor makes the payment to be able to operate or use the asset. For example, a machinery lease allows you to use a machine without owning it.

The contract will determine the lease terms, the lease period, and the amount of the lease payments (which have the interest rate included). Usually, the month’s payment is usually not very high.

Leasing is a financial tool broadly used in the business world.

#DidYouKnow
An auto lease is one of the most common types of lease. Take into consideration that the contract might have a mileage limit.

What Leasing is Not

You should not confuse leasing with a renting contract or an installment sale.

  • Leasing is not renting because it’s more long-term.
  • A lease is not an installment sale because the financial institution has ownership of the asset.

What To Do When The Lease Is Over

The end of a lease is an important time for lessees.

It’s the time when you have to decide whether to purchase the machinery, return it, or renew the lease. So, the lessees who decide:

  • To purchase their leased machinery will need to negotiate with the dealership, get financing, and pay any taxes and fees associated with the purchase.
  • To return their leased machinery, they must ensure it is in good condition and meets all the lease agreement requirements.
  • To renew their lease will need to negotiate with the dealership and may have to pay additional fees.

No matter your choice, it’s important to be informed and prepared before your lease ends.

Types of Leases

This leads us to another essential aspect of the lease contract. There are two types of leasing, financial and operating.

Financial Lease

Financial leasing is when the lease contract includes purchasing the asset when the lease period ends.

The most important characteristic of financial leasing given by a leasing company is that the asset will become yours once you purchase it at the end of the contract.

Operating Lease

An operating lease is when the lease does not include the option to purchase the asset.

The asset never will not be the property of the financial institution with an operating lease.

Pros and Cons of a Lease

Pros of a Lease

  • You will have lower monthly payments since you only pay for using the machinery during the lease term.
  • You will always have a relatively new machine. Lease terms are typically two or three years, so you can simply turn in the machine and get a new one at the end of your lease.
  • In most cases, you can deduct the entire lease payment from your taxes. This can save you a significant amount of money each year.
  • Gives you the flexibility to upgrade to a newer model of machinery more frequently than if you were buying a machine outright.
  • You don’t have to make a down payment, but you have lease payments.
  • You don’t make principal payments like with a loan
  • It does not affect your creditworthiness
  • You have the option to buy
  • Maintenance or tax deductions costs are not your responsibility.
  • The asset depreciation rate does not affect your books
  • You avoid buying assets that have a quick devaluation or are difficult to sell
  • It’s great if you only want to use the asset for a short period

Cons of a Lease

  • You may not be able to change the property without the landlord’s permission.
  • You may have to pay additional fees to end your lease early.
  • You may be responsible for paying for repairs and maintenance on the property.
  • You can only be the owner of the asset until the end of the contract
  • When the asset is yours, you will have to pay taxes
  • It can be more expensive than other financing options
  • You may have to purchase insurance
  • You might only be able to access the assets that the bank or financial institution chose
  • You cannot return the asset until the contract ends
  • It may be more expensive than buying the asset with monthly loan payments
  • You might also have to get an insurance
  • It is not cash that you can invest in any way you can

Common Uses for a Lease

People take out a lease when they need to use assets (like a piece of machinery) that financial institutions offer.

A lease is a better option if you intend to use the asset just for a short period.

Construction workers may lease heavy equipment and trucks, while a business owner may lease office equipment and furniture.

What is a Loan?

A loan is a financial product that allows you to borrow money, whether a person or a commercial loan.

When choosing between lease vs. loan, you should understand that you receive a lump sum of cash for loans.

The financial entity is the lender, and those who take a loan are the borrowers, debtors, or lenders.

#DidYouKnow
Some lenders allow you to spend personal loans in almost any way you want.

How Loans Work

Loans typically have two primary purposes: buying something (like machinery or a house) or consolidating other debts.

Loans also usually come with interest, the price you pay for borrowing money. The amount of interest you’ll pay depends on the type of loan, your credit score, and the loan length (among other factors).

Apply for a business loan today

Types of Loans

There are different types of loan products that you can choose from. Secured and unsecured loans are the main types.

  • On the one hand, secured loans require some type of collateral (it can be an asset, such as a vehicle, a piece of equipment, or even the asset you will purchase).
  • On the other, unsecured loans do not require any collateral.

#DidYouKnow
If you take a secured loan and the collateral is your home, then it’s called a mortgage loan.

Pros and Cons of Loans

Pros of Loans

Loans can be an excellent option. Here’s a list of the benefits of getting a loan:

  • They allow you to make purchases or investments you wouldn’t be able to make otherwise
  • They offer a lot of flexibility: both to purchase machinery or equipment, to improve your cash flow, or to make other investments
  • They can help you get out of financial emergencies
  • Financial institutions can offer you personalized financial advice
  • They are a good way of improving your credit score due to lower monthly payments.

#CaminoTip
If you are going to use a loan to make the down payment of machinery or vehicles, compare the interest rates to the depreciation rate of the assets you will acquire.

Cons of Loans

However, loans have some disadvantages, too:

  • Some lenders offer secured loans, which means that you will need collateral to secure them
  • Generally, you should take into account that you will have to pay interest rates and other fees
  • You must strictly meet the payment dates of your monthly payment so that your credit score is not affected

If you’re looking for flexible, easy-to-acquire loans with low-interest rates and a fixed monthly payment (and no need to pledge collateral), apply for a loan from Camino Financial.

Common Uses for a Loan

People take out a loan to buy particular assets that might not be available to lease. A loan is better if you intend to use the assets for all its durable life.

The thing about loans is that it’s more versatile: you can use them to buy the asset and to invest in many other things: like consolidate debt, invest in marketing, strengthen your cash flow, and more.

How to Choose Between a Loan Or a Lease

Making this decision will depend on how you will use the asset you want to buy:

Getting a loan to buy something means you own it and can use it until the end of its usable life.

You pay for upkeep and any taxes you owe on the property, though. You can modify the property to your liking and even sell it if you choose.

If you lease property, you don’t own it but pay for the privilege of using it for a certain amount of time.

If you want to end the lease agreement early, you will typically pay fees for terminating the contract.

Depending on the agreement, either you or the lessor will pay for its taxes and maintenance.

How Do You Know if a Loan Is Right for You?

When choosing if a loan is right for you, you must think about how much it would cost you not to acquire a loan or to miss the opportunity it provides.

Also, the loan term, monthly cost, how much you will be paying interest, and other factors.

Let me explain with an example:

For example, if you are looking for heavy equipment financing and decide on a loan, you need to as yourself the following questions:

  • How much would your business cost if you didn’t have this equipment?
  • How much would this alternative means of production cost?
  • Are there even other alternatives out there?

If the cost of these other alternatives or processes is higher than the total cost of the monthly loan payment, you should apply for the loan.

The truth is that, in the finance lease vs. loan debate, it all depends on which option is cheaper.

Before making up your mind, consider the costs of your choice

The truth is that, in the finance lease vs. loan debate, it all depends on which option is cheaper.

When choosing if a loan is right for you, you must think about how much it would cost you not to acquire a loan or to miss the opportunity it provides.

Also, the loan term, monthly cost, how much you will be paying interest, and other factors.

Let me explain with an example:

For example, if you are looking for heavy equipment financing and decide on a loan, you need to as yourself the following questions:

  • How much would your business cost if you didn’t have this equipment?
  • How much would this alternative means of production cost?
  • Are there even other alternatives out there?

If the cost of these other alternatives or processes is higher than the total cost of the monthly loan payment, you should apply for the loan.

Is It Better to Finance or Lease?

Identifying the real difference between lease and finance may be a tricky situation.

But loans are the best option for most people, even with monthly payments.

Sometimes, the lease and the loan payments will be the same, so a loan could be a better option: you will pay the same amount and end up owning the asset.

Have you decided what is better for you?

At Camino Financial, we always look for ways to help the business community grow and prosper. That is why we offer loans with competitive financing rates that adapt to the applicant’s needs.

We have minimum requirements that will allow you to get the loan you need in less than two days:

  • If you don’t have an SSN, you can apply with your ITIN
  • You can complete our paperless application online, anytime, anywhere
  • Applying will not hurt your credit score because we use a soft pull
  • We have both business and personal financing options

Our loans have helped thousands of business owners like yourself create a stronger and brighter future.

Apply for a business loan today

FAQs

Is a lease considered a loan?

It’s often confusing these terms, so no, you borrow money from a financial institution when you ask for a loan. In a lease contract, you sign it to lease it as an asset.

What is a Leaser?

This term refers to an entity that is in charge of renting something.

What is a Lease vs. Lease Loan?

When you lease a machine, you are essentially renting it for a period of time. Typically, leases last for two or three years. You must return the machine to the dealership at the lease’s end.

Lease loans are a little different. With a lease loan, you buy the machine and then lease it back to the dealership. This can be a more affordable way to buy a machine since you’re spreading out your payments over time. Plus, you own the machine outright at the end of the loan term.

Is a loan better than a lease?

There are pros and cons to both loans and leases, so it depends on the specific situation. Some people prefer to own their machinery outright, while others enjoy leasing flexibility.

The advantage of a loan is that you eventually own the machine outright, although you will have to make monthly payments for a certain amount of time.

This advantage of a lease is that you don’t have to worry about depreciation or selling the machinery at the end of the lease. You can simply turn it back in and start leasing another vehicle.

Why leasing a car is smart?

When you lease, you typically don’t have to worry about depreciation. The biggest cost automakers face when selling a car.

And since leasing contracts are often shorter than loans, you can switch to the newest model every few years without worrying about being “upside down” on your car loan.

Additionally, many leases come with roadside assistance and other perks that can make life easier.

What does it mean to lease something?

When you lease something, you borrow it from the owner for a specific time. At the end of the lease, you may have the option to buy it, renew the lease, or return it to the owner.

Is financing a loan?

It is. A loan is a great way to get the money you need to buy a machine or a home or to cover other major expenses.

Do leases build credit?

Yes, leases can build credit. This is because when you sign a lease, you enter into a legal agreement to make payments on time. If the lease issuer reports these payments to the credit bureaus, it can help boost your credit score.

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