Lease or buy equipment: how to compare

Buying looks 1,800 cheaper, but the real gap is 618 and can flip. How to compare properly.

Three ways to get equipment

To use a machine, vehicle or piece of equipment you can buy it, take a finance lease (rental with an option to buy at the end) or an operating lease (rental that often includes servicing and insurance, without ownership). The exact terms, and their tax treatment, depend on the contract and the country.

To compare them, the question is the same in all three cases: how much does it cost you to use the equipment for as long as you need it?

An example with numbers

You need a machine for 3 years. Buying it costs 12,000 and you expect to sell it for 3,000 at the end. Leasing it costs 300 a month.

• Ignoring when you pay: buying costs 9,000 (12,000 minus the 3,000 from the sale) and leasing 10,800 (36 payments of 300). Buying looks 1,800 cheaper.
• Taking into account when you pay, with a cost of money of 5% a year: buying costs 9,408 and leasing 10,026. Buying still comes out ahead, but only by 618, because you pay 12,000 on day one and get part of it back years later.
• If you only got 1,500 when selling, buying would cost 10,704 and leasing would be 678 cheaper.

Resale value often decides the result, and it is the most uncertain figure. Work out a pessimistic case too.

Beyond cost

• Cash: buying means paying 12,000 today; leasing, nothing at the start. If cash is tight, that can matter more than the cost difference.
• Servicing and breakdowns: if the lease includes them, add them to the cost of buying.
• Flexibility: will you need to change equipment sooner? Can you cancel the lease?
• Tax: how each option is deducted varies by country. Ask your adviser.

Compare your options with the buy vs lease equipment calculator and check the effect on your cash with the cash flow forecast.

Run your own numbers