Buy vs Lease

No. 1339

Information Sheet

August 2001

Should I Lease or Buy?

Steven W. Martin, Fred Cooke, Jr., David Parvin, and Scott Stiles

I NTRODUCTION

For many farms, machinery expense is the largest single production expense (Massey). Under current farm financial conditions, producers must search every avenue for opportunities to minimize costs and maximize returns. Producers have three basic options for meeting machinery needs: purchase the needed equipment, lease the needed equipment, or custom hire. Custom hire may work well for certain jobs, but often does not allow the amount of control many operations require. Like purchasing, leasing allows the producer to maintain control of the timeliness and quality of the work conducted on his or her farming operation. Therefore producers should evaluate leasing versus purchasing based on the economic opportunities that each provides.

OVERVIEW

Most leases consist of four basic components: • Periodic payment • Length of lease • Amount of use (hours, miles, etc.) • Residual Under a standard lease agreement, the lessee (farmer) agrees to pay the lessor (bank, credit corporation, dealer, etc.) a specified amount (payment) at certain intervals over a certain length of time. Three-year leases with annual payments are very common, but any arrangement is possible. The lease will generally specify the amount of annual use permitted under the base contract. Tractor leases often range from 300 to 1200 hours of annual use. The amount needed to purchase the equipment at the end of the lease is the residual. Any and all of the components are negotiable. Lease arrangements are based on an initial price for the equipment. As with purchases, producers should negotiate the best deal possible, then consider whether to lease or purchase based on the negotiated price. Just as a lower negotiated price lowers the costs associated with a purchase, a lower negotiated price lowers the costs associated with a lease. Once the initial...