It’s essential to understand that the term ‘leasing’ has a vast spectrum of meanings. In this article, however, we’ll be focusing specifically on lease purchases, where the ultimate goal is to acquire the equipment at the end of the lease term.
Understanding the Difference Between a Lease and Loan
Deciphering the difference between a lease and a loan might seem like a challenge, but we can distill the basics into an easily understandable format.
What is an Equipment Loan?
An Equipment Loan is a scenario where the Lender (the entity that is providing the funds) loans a specified amount to the Buyer (the entity purchasing the equipment). This loan is then utilized for the acquisition of a piece of equipment. The Buyer makes the purchase in their name, and the Lender files a UCC or Lien on the equipment until the mutually agreed upon payments have been fulfilled.
What is an Equipment Lease?
An Equipment Lease, on the other hand, is fundamentally a rental agreement. The Lender procures the equipment on behalf of the Buyer. After the completion of the agreed-upon payments, the Buyer then has the option to buy the equipment for a predetermined residual amount. Common residual values include $1, 10%, or Fair Market Value (FMV), which we’ll delve into in a future discussion.
So, What’s the Fundamental Difference?
Put simply, the primary distinction between an Equipment Loan and a Lease lies in the ownership of the equipment during the payment plan. Also, a Lease inherently includes a residual value at the end of the term.