When a tractor lease makes sense vs. when to buy - Tractor Zoom

When a tractor lease makes sense vs. when to buy

Dec. 08, 2021 • Blog

Looking for a way to finance your next tractor purchase? With a lofty price tag, you may think a bigger, newer tractor is out of the budget, but a lease option may be your ticket to a more advanced and efficient tractor for a smaller monthly payment. 

What is “leasing” a tractor?

The concept of leasing equipment is similar to renting — pay for the value of the item over time, rather than pay for the piece of equipment itself. For example, if you were to lease a John Deere tractor, you would pay a fixed monthly rate and have the ability to use the tractor as your own. The only difference is you have the option to “buyout” or purchase the tractor at the end of the lease term for a reduced price.

Farm equipment leases can be used for most types of machinery at dealers, auction, or private sale and can be obtained through the dealer or other lenders. Regardless of what piece of equipment you want or where you get it from, it’s important to consider these factors when determining whether to lease or buy a tractor or other piece of farm equipment: 

  • Residual/buyout: If you intend on purchasing the tractor at the end of the lease, it’s important to consider the buyout value and residual, how much the machine will be worth after depreciation. Leases also simplify and reduce the cost of owner transfer by reducing tax implications.
  • Term length: Generally tractor leases will last anywhere from 2 to 7 years, but most lenders won’t provide leases for equipment over 15 years old.
  • Credit score: Do you need good credit to lease a tractor? In short, yes. The higher your credit score the better interest rates you can get and less you’ll have to spend overall. Typically, an average credit score (500+) is acceptable to most lenders.
  • Interest rates: Lease interest rates are generally cheaper than that of loans. So lock in a low rate with your lender and you’re good to go.
  • Tax deductibility: As a farm asset, tractors and other farm equipment under rental or lease can be written off as a business expense. Loans are typically more subject to taxes.

Is it smart to lease a tractor? 

You know your operation best. While leasing a tractor can save money and provide a desirable cash flow, a tractor loan can be more beneficial to those looking to simply build equity. As long as you make an informed purchasing decision by considering term length, tax implications, and the other influential factors listed above and find a lease that suits your needs, leasing a tractor can be a remarkably smart investment. 

For beginning farmers, it’s all about being strategic depending on the type of operation you’re looking to run. With little start-up capital, leasing makes it easier for young farmers to build more equity through land, buildings, or other assets while still being able to get the quality equipment they need. Especially with tighter lending requirements and lower farm income, leasing options are becoming more advantageous. 

How do I calculate whether to lease or buy?

The following equations from the University of Nebraska-Lincoln’s Institute of Agriculture and Natural Resources can help determine if a lease option or loan is better for your operation.

Loan payments

Loan payments are divided up based on the purchase price and accrue interest over the length of the loan.

  • Financed Value = Asset Purchase Price (APP) – Down Payment (DP)

Lease payments

Lease payments are calculated based on a fixed monthly rate that factors in depreciation. 

  • Lease payment = Depreciation fee + Finance fee
  • Depreciation fee = (Net cap cost- Residual)/Term
  • Net cap = (Gross machine capital value + Remaining loan amounts + Add-on fees) – (Down payment + Trade-in + Discounts)

A low residual (equipment value at the end of the lease) and negotiated net cap cost make for the optimum lease value. 

Buying a tractor is imperative to a farmer’s career and making the right purchasing decision is key. Tractor leases provide farmers with a cost-effective alternative to traditional loans that make it more possible for farmers to upgrade their equipment and maintain positive cash flow. 

Tractor Zoom is connecting farm equipment sellers and buyers faster than ever before. Finding farm equipment at auction or at a dealership has never been so easy.

Download App