Long-Term Debt Vs. Leasing

Buying a big ticket item, from a car to business equipment, usually requires taking on debt, often for many years. As an alternative, you could lease the item you need. When you lease, you’ll make monthly payments just as you would with long-term debt, but you’ll make the payments only for the term of the lease. Depending on your financial situation, your tax picture and your goals, both long-term debt and leasing have advantages and disadvantages. Knowing your options will help you make the right decision for you.

Debt -- Advantages

When you take on debt, you build equity in the item you’ve financed. Eventually, when you’ve paid off the loan, you’ll own the item. You’re free to do with it as you please, whether you want to modify your truck to compete in off-road rallies or you want to remodel your office building. If you have a business, the interest on your debt payments is tax deductible as a business expense, and you can deduct depreciation on the item you’re buying. If you decide to sell the item after you’ve had it a while, you keep any profit you make.

Leasing -- Advantages

With a lease, the person you’re leasing from retains the title to the item. If you have a business, your lease payments represent a business expense. If you grow tired of the item, it doesn’t have all the features you need or you want to upgrade to the latest and greatest model, you simply turn in the item and negotiate a new lease on a newer model that better meets your needs. If you get in a tight spot financially and can no longer afford payments for some leased items, you may turn them in and end the lease. Because the owner of the item knows it’s coming back to them at the end of the lease, and the item will still have some value, lease payments are often lower than the payments would be if you financed the item and purchased it outright.

Debt -- Disadvantages

Financing a big ticket item can be a hassle. You’ll need to prove your creditworthiness and your ability to make the payments. And once you commit to the debt, you’re stuck with the payments unless you sell the item or default. Debt is a long-term liability on your financial statement. If you own a small business and you’re trying to improve your credit rating to acquire new financing for your business, attract investors or qualify for certain jobs, having a lot of long-term liability can be a negative. Also, when you use long-term debt to buy an item, you’re stuck with the item for a long time. With technology, this can be a problem. You could spend years paying for obsolete technology, unable to sell the item to recoup your costs because it’s out of date.

Leasing -- Disadvantages

When you lease, you don’t own the item. You don’t get to depreciate items you use in your business on your taxes. If you cancel a lease early, you may have to pay a penalty. You don’t build equity in anything you lease, such as an office building, and you don’t have the right to sell the item at a profit. If you lease an item for a long time, you could end up paying more than if you had financed and paid it off.