Lease Type

Depending on the type of lease that you choose, you could possibly end up getting a lower interest rate. The way that this works has to do with who gets to keep the depreciation from the equipment and how much depreciation they will keep.

Using the example of a capital lease, the lessee gets to keep the depreciation because they are capitalizing it on their balance sheet. As far as the IRS is concerned, this lease is on the lessee’s books and they can take the appropriate amount of depreciation annually to off-set net income and pay less in taxes. In this type of arrangement, the lessor, the lender, does not receive any IRS tax breaks and thus the standard rate of interest will be charged.

If the lease is an operating lease, the outcome may be a little different. Assuming that the lease qualifies as true operating lease, then the lessor will be considered the owner of the equipment and thus “renting” it to the lessee. In this case, the lessor is capitalizing the lease on their books and receiving the tax benefits (depreciation) for it. Whether or not the lessee will actually get a lower rate depends on whether or not the lessee has already reached the maximum amount of depreciation that will benefit them. If they have already used all of the depreciation they can for the year, it would not make economic sense for them to offer the lessee a lower interest rate. If they can still use the depreciation, then it could make sense for them to pass on the savings to the lessee via a lower interest rate on the operating lease.

Keep this in mind when dealing with a lender, ask them if an operating lease could benefit them in anyway, this could be the edge you were looking for.