Comparing Term Lengths for Equipment Loans and Leases
When it comes to getting new equipment for your business, you have a few options for how to pay for it. Two popular choices are taking out a loan or entering into a lease agreement. Both allow you to get the gear you need without a huge upfront cost.But loans and leases work differently, especially when it comes to the length of time you’ll be making payments. Understanding term lengths is key to picking the best financing option for your specific situation.
How Long Are Equipment Loans?
Equipment loans typically last between 2 and 7 years. The most common loan terms are:
- 2 years
- 3 years
- 5 years
- 7 years
Shorter loan terms of 1-3 years are best for equipment that will become obsolete quickly, like computers or other tech gear. Going with a longer 5-7 year loan can make sense for heavy machinery, vehicles, or other assets that have a longer usable lifespan.Banks and lenders want to ensure your loan term doesn’t exceed the equipment’s expected useful life. If the gear will be usable longer than the loan period, that lowers their risk as the lender.Longer equipment loan terms also mean lower monthly payments, although you’ll pay more overall in interest charges over the life of the loan. Shorter terms have higher monthly payments but less interest paid.You’ll need to balance the payment amount you can afford each month with the total interest cost when choosing your ideal loan duration.
What Are Typical Equipment Lease Lengths?
The most common equipment lease terms are:
- 12 months
- 24 months
- 36 months
- 48 months
- 60 months
So leases usually run 1-5 years in length. Short term leases of 1-2 years are best for equipment like computers that get updated frequently. Locking into a 5-year lease could mean being stuck with outdated tech.Longer lease terms of 3-5 years give you more time to pay off expensive machinery or vehicles. But you risk paying for equipment you no longer need if your business changes.Month-to-month and flexible “evergreen” leases are also options. But these usually have higher payment amounts to offset the risk and uncertainty for the lessor.
Key Differences in Loan vs Lease Lengths
When comparing equipment loans and leases, term length is where you see some of the biggest differences:Loans often run longer – Common loan terms are 2 to 7 years, while typical leases are 1 to 5 years. Loans give you more time to pay off big-ticket purchases.Leases are more flexible – You’ll usually have more options with lease lengths, including super short or month-to-month terms. Loans tend to offer fixed 2, 3, 5, or 7 year options.Ownership impacts term choice – Loans let you keep the equipment when paid off, so longer terms fit expensive assets. With leases, you return the gear after making all payments.
Tips for Picking the Right Loan or Lease Length
Choosing the best financing term comes down to the type of equipment and your business financials. Here are some tips:
Match the term length to the equipment’s lifespan – Don’t pay for something longer than you can actually use it. Make sure the loan or lease period aligns with how long the asset will be viable for your company.
Go shorter for tech and computers – Hardware and software can become obsolete quickly thanks to constant updates. Short 12-36 month lease terms are usually smartest for tech.
Consider growth plans and changes – Will you still need this equipment in 3 years? 5 years? Pick loan/lease terms based on projected business growth and plans.
Compare total cost of longer vs shorter terms – A 5-year loan has lower payments but higher interest costs overall. Run the numbers to see longer vs shorter term impact.
Check if there’s an option to buy leased equipment – Some leases let you purchase gear at lease-end. Factor this into your decision on length.
Ask about early buyout or cancellation policy – Even if a term is fixed, you may be able to exit early for a fee if your needs change unexpectedly.
Crunching the Numbers
To make the best decision on loan vs lease length for your small biz, have the financing companies provide complete cost breakdowns for different term options.Then compare things like:
- Monthly payments
- Interest rates
- Early termination fees
- Option to buy leased equipment
Crunching these numbers will help you balance affordability with overall cost.
When Shorter Terms Are Better
While longer loan and lease terms have lower monthly payments, shorter financing options do have some advantages:
Lower interest costs – You pay less total interest the quicker equipment gets paid off. Shortening loan/lease terms by even 1 year can save thousands on interest.
Better for equipment that becomes obsolete quickly – Short 12-24 month lease terms mean you aren’t stuck paying for tech after it’s no longer useful. Loans can leave you continuing to pay off “outdated” assets.
More flexibility if business needs change – Entering shorter length agreements better positions you to pivot if market conditions or tech changes faster than expected.
Forcing a payoff decision sooner – Short term loans/leases mean deciding to fully buy equipment or return it in as little as 1-2 years. This can motivate you to make a call on whether that long-term commitment to the gear is right for your operations.
When Longer Terms Work Better
While shorter loan and leases can save on interest and provide more exit flexibility, longer financing options do have some key perks:
Lower monthly payments – Stretching payments over 5-7 years instead of 2-3 makes gear more affordable month to month. This helps cash flow for expensive purchases.
Works better for assets with longer lifespans – Lengthy loan terms match better to assets like heavy equipment, machinery, vehicles expected to be usable for 7-10+ years.
Allows you to “future proof” tech – Got your eye on that shiny new server, AI system, or machine learning software? A longer lease lets you lock in cutting edge tech for several years.
Spreads out upfront cost – Big down payments can bust budgets. Longer financing spreads payments out over more years, easing that initial cash burden.
Ownership! – Loans mean you eventually own the equipment. Longer 5-7 year loans build equity and let you keep assets after the payoff.