One of the most frequently asked questions in equipment leasing is “is there a penalty if I pay off my equipment lease early?”
The answer to this question depends on the lease arrangement that you have with your lessor. There are usually two common types of equipment leases and they all have their pros and cons. Let’s take a look at the two types of leases and what happens when the period for each expires.
What Happens At The End Of An Equipment Lease?
The first type of lease is the finance lease or capital lease. This lease is a very good option if you plan to own the equipment at the end of the lease. Interest charges plus full purchase price are spread over the entire period of the lease. At the end of the lease, you will own the equipment at a lower price. Depending on the agreement you had with your lessor, you can purchase the equipment at the cost of $1 or a fixed percentage of the original cost at the end of your lease period.
The operating lease, otherwise known as a true lease, is useful if you have equipment that quickly becomes obsolete or rapidly depreciates. It is the most tax friendly form of leasing and offers three choices at the end of your lease. You can either:
- Extend your lease term
- Purchase the equipment at fair market value
- Return the equipment to the leasing company.
As you can see, what happens at the end of your lease depends on the kind of lease you signed up for. It also gives you an idea of how your lease works.
Is There A Penalty If I Pay Off My Equipment Lease Early?
Your lease contains terms dictating when the lease will end, how you can end it early and what happens if the lease is terminated by non-performance. It is very important to first of all check your lease agreement and determine some of the ramifications for early termination of your lease.
Most lease agreements have a clause that allows their clients to pay off their equipment lease early at a fee. You can take advantage of this clause and clear the costs of your lease agreement provided you have enough money to do so since it can be quite costly. The biggest question that you should ask yourself is how beneficial is it for your business to pay off an equipment lease early?
Leasing has a number of advantages. First and foremost, it will help you acquire equipment that you would have otherwise not been able to afford if you were to pay for it at once through a cash purchase. If you are not properly prepared and have a poor cash flow, you might put your business in jeopardy when you pay off your equipment lease early.
If your business requires equipment that needs to be updated on a regular basis, leasing will help you to lower the costs. When you decide to pay off your lease, the cost and burden of having to upgrade your equipment every so often will be upon you. Once more, the issue of cash flow might be an obstacle if there is not enough to ensure that your equipment stays up to date.
Are There Any Benefits Of Paying Off Your Equipment Lease Early?
The good news is that there are some benefits that you can enjoy from paying off your equipment lease early. If you are shifting your business to a new location or plan on opening up a completely new business, the “early termination” clause will work to your advantage.
If you are still wondering “is there a penalty if I pay off my equipment lease early”, then you should weigh the pros and cons. Will paying off the lease early benefit you more than it will hurt your business? If this is the case, then paying off your lease does not make much sense. Your business could suffer a financial death that can be avoided by leasing your equipment until the period expires.
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