We get a lot of questions about the end of an equipment lease. In this post, we’ll answer some of the most common, including:
- Can I pay off my equipment lease early?
- Is there a penalty to buy out my lease early?
- Should I buy out my lease if I have the cash?
Before we answer those questions, there are a few things you need to know about the end of your equipment lease.
3 Things to Know About the End of Your Lease
How does the end of an equipment lease work? What happens at the end of the lease? There are 3 key elements to be aware of regarding the end of your equipment lease, so let’s look at them more closely.
1. Your Buyout Option
You should understand the end-of-term buyout option before you even sign the lease agreement. There are several options, and the options available to you will depend on credit approval.
The most common end-of-lease buyout options include:
- Nominal buyout (e.g. $10)—You own the equipment after buying it out for a nominal amount, usually $10 at the end of the lease.
- Residual buyout—You own the equipment after buying it out for a percentage of the total purchase price at the end of the lease—usually 10%, but it varies depending on the type of equipment and credit approval.
- Fair Market Value buyout—You own the equipment after buying it out for the fair market value of the equipment as determined by the lessor at the end of the lease.
What you need to know about the end of your equipment lease is what your buyout option is. This enables you to budget the right amount for that buyout payment.
2. Last Payment
The most common initial payment structure of an equipment lease is the first and last monthly lease payments (or security payment) in advance instead of a down payment on the equipment. If this is how your lease is structured, be sure you get credited for that last (or security) payment when exercising your buyout option.
3. Buyout Due Date
Do you know when your buyout is due? As soon as you sign an equipment lease, mark the buyout date on your calendar so you don’t miss it. Forgetting your buyout due date could cost you more money.
Some lessors will continue your payments until you exercise your buyout. If you don’t remember, they won’t remind you. This is one advantage of having a Lease 1 lease coordinator. We keep track of your buyout dates and contact you well in advance to coordinate your buyout so you don’t pay a penny more than necessary.
Can I pay off my equipment lease early? Is there a penalty to buy out my lease early?
You can always buy out your equipment early without penalty. You simply owe the balance of payments to the end of the lease. It’s like lease contracts on rental retail space. If you want out of a 5-year lease at the end of 2 years, you owe the landlord the balance of payments—3 whole years’ worth.
Should I buy out my lease if I have the cash?
If you come into some extra cash, it’s tempting to buy out your lease early so you don’t have that payment anymore. You can do that, but you’ll end up paying all the costs to finance your equipment purchase upfront without enjoying the tax benefits that come with monthly lease payments.
At any point in time, 61% of businesses struggle with cash flow issues, so there are advantages to keeping your money in the bank. If your business is profitable, the tax write-offs that come with lease payments are helpful. Plus, your equipment is a depreciating asset. Banks care more about the cash you have than the equipment you own.
An alternative to spending that money on buying out your lease is to invest in a GIC so you can make a bit more money and know it’s there to help you make payments in case of an emergency. Or consider buying your building as an appreciating asset.
3 Options to Consider Instead of Buying Out Your Lease
Even though you can buy out your lease early, is it the best option for you? There are other options to consider. Here are the 3 most common ones.
- Trade in your equipment: If you want to upgrade your equipment, your vendor might be willing to take your current equipment by offering you trade-in value. This is called a “trade-up lease”. The cost of the new equipment less that trade-in value becomes the new lease. This allows you to progress in your business without having to wait for the end of your lease.
- Sell your equipment: If you want to sell the equipment, it’s just like selling a vehicle that’s on a bank loan. It’s important that the bank/lessor be paid out first.
It’s extremely important that you follow steps to keep yourself legal. The lessor must be paid the balance of payments on your lease before you receive any amount of the sale proceeds. If you don’t sell the equipment for enough money to cover the balance of payments on your lease, you’ll have to cover the shortfall “out of pocket”. Our lease coordinators can walk you through this process.
- Lease assumption: If you find a buyer who wants your equipment, they may be able to assume the lease (upon credit approval), much like you can assume a mortgage or a vehicle lease. There are some legalities involved in this process. Our lease coordinators can walk you through it.
A Leasing Coordinator Can Coordinate Your Buyout
You can always buy out of your lease early, but why do you want to? If this is something you’re considering, talk with one of our leasing coordinators. We can let you know your options and help you understand the advantages and disadvantages of each one.
Still have questions about the end of your lease? Our lease coordinators are here to help. Contact us today.