Buyout/Purchase options are generally determined before the lease begins. They outline your final financial obligations at the end of the lease. The following will give you a complete description of what those options are, and how they will affect you.
Fair Market Value (FMV) Purchase Option
At the end of term, you usually have the following options:
Purchase the equipment for its then Fair Market Value, extend the lease for a pre-determined length of time (of course, this period will be stated in your original lease contract or return the equipment at the end of term. It should be noted that not all contracts feature the latter option, so be sure to check your lease agreement.
Fair Market Value (FMV) Purchase
At the end of term you are obligated to purchase the equipment for its then Fair Market Value.
With this particular option, at the end of term you have these choices:
- Purchase the equipment for 10% of its original purchase price, extend the lease contract for a pre-determined length of time (as specified in your original lease contract), or
- Return the equipment when the term ends. Also remember that your contract may not feature the latter option. Please make certain you have it added if it is of interest to you.
- With this form of leasing contract, you are generally required to give written notice of the option you wish to select before term ends. Please review your lease agreement to understand the timing of this written notice
10% Put Contract
With this contract, at the end of the lease term you are obligated to purchase the equipment for 10% of its original purchase price.
The customer purchases the equipment for $1 at the end of a capital lease and the equipment title is then transferred from the leasing company to the customer.
Comparing Purchase Options
Some advantages of the Fair Market Value option include open-ended terms, lower monthly payments and a greater tax benefit than with other buyout options. As well, if your equipment depreciates rapidly, this is by far the best option.
Some disadvantages of this purchase option is that it can be somewhat ambiguous and result in a valuation that is high. Leasebanker by FCL generally negotiates this value with our customers at the end of the lease.
A 10% Purchase Option or Put end of lease payment is generally determined at the inception of the lease as either a fixed percentage of the equipment cost or a specified dollar amount. With this option, you must pay the Fixed Put. It is considered a final payment in most cases. The Fixed Put is beneficial if you would like a lower monthly payment and are not concerned about making an additional payment at the end of lease.
The benefit of a $1 Buyout is that the final payment is only a dollar. This generally comes at the expense of a higher monthly payment and a smaller tax benefit.
Some Advice From Leasebanker by FCL
Please always make sure you carefully read your lease contract. Terms may differ depending on the leasing company you use.
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Memphis, Tennessee 38119