Machinery Finance Comparison
The monthly figure is not the comparison. Depreciation relief, interest deduction and what the asset is worth in five years all move the answer, often enough to reverse it. This works out the net cost of all three routes after tax.
The asset
Term loan terms
Lease terms
Rs.2.7 L cheaper than the most expensive route here. Ownership passes only if you exercise the buyout. The full rental is deductible in the meantime.
Net cost after tax relief and resale
KarobarUdhar Insider Tip
The tax argument decides this more often than the interest rate does. Buying lets you claim depreciation and interest, and on these figures that is Rs.22,25,179 of depreciation over 5 years alone. Leasing lets you claim the whole rental instead. Which is worth more depends on your tax rate and on how quickly the asset depreciates, so a business paying little tax gets far less from the buying route than a profitable one does. Run this with your actual tax rate rather than a default.
KarobarUdhar Insider Tip
Resale value is where these comparisons usually go wrong. If the machine holds value, buying wins by a wide margin because the residual is yours. If it is specialised, technology-dependent, or has a thin second-hand market, the residual you assumed may not exist and leasing quietly becomes the better trade. Set the resale figure to zero and see whether your answer changes. If it does, the decision rests entirely on an assumption you have not tested.
Indicative only. Costs are totalled without discounting to present value, so a route with a heavier upfront payment is treated slightly harshly. Depreciation is computed on written down value at the rate you enter; confirm the applicable rate for your asset class with your accountant. Hire purchase is modelled at a 15 percent margin and a finance charge 1.5 percentage points above your term loan rate, which is a working assumption rather than a quotation. GST input credit treatment differs between purchase and lease and is not modelled here. Take the tax position from your accountant before committing.
Two things decide this, and neither is the interest rate
The first is your tax position. Buying gives you depreciation and interest as deductions. Leasing gives you the whole rental. Which is worth more depends on how much tax you actually pay, which is why the same quotation can favour buying for one business and leasing for another with identical numbers on the page. A business showing little taxable profit gets very little from the depreciation argument that makes buying look attractive in a textbook.
The second is what the machine is worth when the term ends. This is where most comparisons quietly fail, because the residual is assumed rather than researched. A general-purpose machine with an active second-hand market holds value and buying wins comfortably. A specialised or technology-dependent asset may be worth far less than assumed, and the whole case for owning it collapses with that number.
Run the comparison twice. Once with your assumed resale value, once with it set to zero. If the answer changes between the two, the decision rests on an assumption you have not tested, and testing it is worth more than negotiating half a percent off the rate.
How to use it
- Use the actual quotations you have. Asset cost, monthly lease rental and buyout figure. Defaults here are illustrative and will be wrong for your case.
- Enter your real tax rate. The tax shield is what usually decides this comparison, and it is worthless to a business paying little tax.
- Be conservative on resale value. Then run it again at zero. If the answer flips, your decision rests on an untested assumption.
- Compare net cost, not monthly outgo. A lower rental can still be the more expensive route once relief and residual value are counted.
Common questions
Is leasing cheaper than buying machinery?
It depends almost entirely on your tax rate and on what the asset is worth at the end. Buying lets you claim depreciation and interest and keeps the resale value. Leasing lets you deduct the whole rental but leaves you owning nothing. A profitable business with an asset that holds value usually does better buying. A business paying little tax, or acquiring equipment that dates quickly, often does better leasing.
How much margin money will a lender want on equipment?
Commonly 25 to 30 percent for a term loan, and less under hire purchase, which is part of why hire purchase carries a higher finance charge. Used or imported machinery attracts a higher margin because recovery value is harder to establish. Include tooling, installation and power connection in your project cost, since these are often funded differently or not at all.
What is the difference between hire purchase and a term loan?
Under a term loan you own the asset from day one and the lender holds a charge over it. Under hire purchase ownership passes to you only at the end of the term once all instalments are paid. The practical differences are the margin required, the finance charge, and how the asset appears in your books during the term.
Why does resale value matter so much in this comparison?
Because it is the single largest swing factor and the one most often assumed rather than checked. If the machine holds value, buying wins by a wide margin because the residual is yours. If the second-hand market is thin, the residual you assumed may not exist. Set it to zero and see whether your answer changes.
Does this include GST input credit?
No. GST treatment differs between an outright purchase and a lease rental, and whether the credit is available to you depends on your registration and output supplies. It can move the comparison meaningfully, so take that part from your accountant before committing.