Friday, January 29, 2016

Is a Machine Tool Loan the same thing as a Capital Lease?

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. 

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