While a leasing salesperson might say that a loan is the
same thing as a machine tool lease, the differences far outnumber the
similarities. The differences include the
non-cancellability nature of leases, the method of quoting an interest rate, and
the likelihood of prepayment penalties.
Non-cancellability-
Machine tool leases are not simple-interest contracts. Machine tool leases have a fixed
amortization. This means that you cannot
make additional principal payments throughout the life of the loan and have the
extra funds go straight against the contract principal. This ensures that the leasing company makes
most of the profit it expected on the day the lease funds.
A simple-interest loan from Banterra Bank allows additional
principal payments at any time. This can
greatly reduce the amount of interest paid on a loan.
Interest Rate Quoting-
Leases generally do not disclose the rate on the documents. There are many reasons for not disclosing the
rate on a lease. It is not uncommon for
a rate quoted on a lease to not be the actual Annual Percentage Rate. Advanced Payments, delayed funding to the
equipment supplier, purchase options and a variety of other lease
characteristics create many opportunities for a leasing company to quote a rate
that is different than the actual Annual Percentage Rate.
A true simple-interest loan will always display the rate on
the documents. This is the only way to
make sure you know exactly what rate you are actually paying.
Prepayment Penalties-
Most leases have significant prepayment penalties and some will not allow
prepayment at all. Prepayment penalties
can make it expensive to pay off a contract, sell equipment or trade in the
equipment on a new purchase. Prepayment
penalties have a large impact on what rate is ultimately paid when the lease is
completed. Some lease agreements do not
allow any prepayment and the total balance of the remaining payments is due in
order to pay off the lease.
Most simple-interest loans do not have prepayment penalties
which gives a company a lot of flexibility should their equipment needs change
or want to pay off early to eliminate some debt.
Machine tool leases and loans both allow a company to retain the
tax benefits of equipment ownership.
That is about all of the similarities between a machine tool lease and a
loan. In most situations, it is our
opinion that a straight simple-interest loan offers many advantages over a
machine tool lease.
