If you’re considering getting a car or other equipment, it’s important to know your options when it comes to financing. Thankfully, you don’t have to buy it outright. You can choose to either get a loan to pay for it, or pay for the item on lease. Here are the differences between a loan vs lease and what you should consider before financing.
Loan vs Lease:
First, let’s establish, what is the difference between a loan and a lease? A loan is when you borrow money from a financial institution to pay for something – for example, a car. You then proceed to pay back that loan to the lender over a set period of time. Once you have completely paid off the loan, you own the car. With a lease, on the other hand, you never own anything. You still make payments over a set period of time, but once that time comes to an end, you give the car back and you start the process over again.
9 Things to Consider Before Financing
Rates
Loan: With a loan, rates are usually floating. This means that as the index fluctuates so does your monthly payment. This can really help you during periods of falling interest rates, but it can also really hurt you when interest rates rise.
Lease: Unless your lease has special arrangements, payments will generally be fixed for the entire term. This can be a plus, as it can be much easier to budget and manage your cash flow.
Amount Financed
Loan: Banks usually only lend a portion of the equipment or vehicle cost. The amount they lend is about 60%-80%. It does not include the costs of shipping, training, installation, or any other soft expenses.
Lease: You can get up to 100%, which includes soft costs and sales tax. Any out-of-pocket costs are usually limited to the first month’s investment or a small security deposit.
Available Terms
Loans: Banks are typically less flexible than leasing companies. This isn’t a bad thing if you’re looking for a standard term. If you need some flexibility, though, it’s not so great.
Lease: In most cases, you will choose the terms, purchase option, and the down payment of your lease. Custom terms can usually be arranged.
Ease of Application
Loans: Most banks won’t begin to review your credit until you have submitted a complete financial package. This is regardless of the amount you are requesting to borrow.
Lease: Most places have a simple application process and don’t require extensive information before they approve the lease.
Extra Costs
Loan: Banks use fees to boost their rates of return on loans. These fees include application fees, origination fees, commitment fees, schedule fees, funding fees, and fees associated with approving and executing the loan application.
Lease: In most small-ticket leases, which are anything up to $75,000, there are no origination, commitment or application fees. Documentation fees depend on the transaction size, and can range from $195 to $295.
Equipment Types
Loan: If the bank does not understand or feels the equipment has limited collateral value, they will not finance it.
Lease: You will find that you’re able to get a lease on most equipment.
Speed
Loan: Banks are slow to make a decision on credit. It can take weeks for them to prepare your request and put it in front of the credit board.
Lease: Decisions on leases are typically quick and can be made within a day.
Collateral
Loan: Banks will usually secure their loans by requiring extra collateral such as real estate, equipment, inventory, receivables, or your house.
Lease: In most cases, the only collateral is the equipment or vehicle being leased.
Restrictive Covenants
Loan: Bank loans often require the borrower to maintain minimum financial ratios, otherwise they will call the loan. The borrower must also report on a regular basis so the bank can ensure they are maintaining the ratio. If the bank does call the loan, they have the power to limit future borrowing from them and any other financial institution.
Lease: There are usually no such restrictive covenants.
Do you have any other questions about the difference between a loan vs lease and what to keep in mind when financing? Let us know! Give us a call today at 1-866-991-4885.
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