Last updated: October 2026
Short answer: An equipment lease payment is the equipment’s cost, minus today’s value of the residual (the end-of-lease buyout or value), spread over the number of payments at the lease’s interest rate. For example, a $50,000 machine leased for 60 months at an assumed 8% costs about $1,014 a month with a $1 buyout, or about $946 with a 10% residual. To run your own numbers, use the lease calculator.
The equipment lease payment formula
A lease is a loan that doesn’t have to pay down to zero. You pay off the cost minus the residual, plus interest on the whole amount. The exact formula is the loan payment formula with a balloon at the end:
Payment = (C − RV ÷ (1 + r)n) ÷ A
- C = equipment cost (the amount financed)
- RV = residual: the buyout price or the value assumed at the end
- r = monthly rate (annual rate ÷ 12)
- n = number of monthly payments
- A = (1 − (1 + r)−n) ÷ r for payments in arrears, at the end of each month. For payments in advance, multiply A by (1 + r).
With a residual of zero, this is the ordinary loan payment. The business loan calculator uses that formula.
The money-factor shortcut
Car leases and many quick quotes use a simpler version, and our lease calculator uses it too:
Payment = (C − RV) ÷ n + (C + RV) × money factor, where money factor = annual rate ÷ 2,400.
At 8%, the money factor is 0.00333. The first part pays down the cost to the residual. The second part is an approximate interest charge on the average balance. For the $50,000, 36-month, 10% residual example below, the shortcut gives $1,433.33, compared with $1,443.47 from the exact formula with payments in arrears. Use the shortcut for a first estimate, and ask the lessor for the exact figure in writing.
Advance vs arrears
Most equipment leases bill the first payment at signing, which is called payment in advance. Some also collect the last payment up front. Paying a month earlier means the lessor earns a little less interest, so each payment is slightly lower. You pay sooner, though. Check the contract for the number of payments due at signing.
Worked examples: a $50,000 machine
All figures assume an annual rate of 8%. That rate is an example, not a market quote. They were calculated in Python with the formula above. The 10% residual is $5,000.
| Term | End option | Payment (arrears) | Payment (advance) | Payments + buyout |
|---|---|---|---|---|
| 36 months | $1 buyout | $1,566.79 | $1,556.42 | $56,405.57 |
| 36 months | 10% residual | $1,443.47 | $1,433.91 | $56,964.91 if you buy |
| 60 months | $1 buyout | $1,013.81 | $1,007.09 | $60,829.37 |
| 60 months | 10% residual | $945.77 | $939.51 | $61,746.26 if you buy |
“Payments + buyout” uses the arrears payment, with totals from unrounded payments. A 10% residual lowers the payment by about $123 a month over 36 months and $68 a month over 60 months. If you then buy the machine at $5,000, you pay about $560 to $917 more in total, because you carried a larger balance for longer. If you return it, you pay $51,964.91 (36 months) or $56,746.26 (60 months) and don’t own the machine.
Lease vs loan on the same machine
| $50,000 at 8% | Monthly payment | Total paid | You own it at the end? |
|---|---|---|---|
| Loan, 36 months | $1,566.82 | $56,405.46 | Yes |
| $1 buyout lease, 36 months | $1,566.79 | $56,405.57 | Yes, for $1 |
| Loan, 60 months | $1,013.82 | $60,829.18 | Yes |
| $1 buyout lease, 60 months | $1,013.81 | $60,829.37 | Yes, for $1 |
| 10% residual lease, 60 months | $945.77 | $56,746.26 + $5,000 to buy | Only if you pay the residual |
At the same rate, a $1 buyout lease and a loan cost about the same. In practice the difference comes from the terms around the payment:
- the rate each lender actually offers;
- whether a down payment or several advance payments are required;
- documentation fees, and any sales tax charged on each payment;
- who pays for insurance and maintenance.
To compare a loan offer, put the same amount and term into the business loan calculator or the general loan calculator. Then set those results next to the lessor’s quote.
Lease rate factor vs money factor
Lessors often quote a lease rate factor (LRF) instead of an interest rate. The LRF is the monthly payment divided by the equipment cost. In the examples above:
| Lease | Payment | Lease rate factor |
|---|---|---|
| 36 months, $1 buyout | $1,566.79 | 0.03134 |
| 36 months, 10% residual | $1,443.47 | 0.02887 |
| 60 months, $1 buyout | $1,013.81 | 0.02028 |
| 60 months, 10% residual | $945.77 | 0.01892 |
To turn an LRF into a payment, multiply it by the cost. A $50,000 machine with an LRF of 0.02028 costs about $1,014 a month. An LRF hides the interest rate, so comparing two quotes only works if the term, residual and payment timing match. If they don’t, ask each lessor for the implied annual rate.
A money factor is something else: the annual rate ÷ 2,400, used in the shortcut formula. Don’t mix the two up. An LRF of 0.02 means a $1,000 payment on $50,000, while a money factor of 0.002 means a rate of about 4.8%.
$1 buyout vs FMV vs 10% PUT
| End-of-lease option | What happens at the end | Payment | Typical fit |
|---|---|---|---|
| $1 buyout | You buy the equipment for $1 | Highest | Equipment you plan to keep for its full life |
| Fair market value (FMV) | You can return it, renew, or buy it at its market value at that time | Lowest | Equipment that goes out of date quickly, like tech and some medical gear |
| 10% PUT (purchase upon termination) | You must buy it for 10% of the original cost | Between the two | Lower payments when you already plan to keep it |
| 10% option | You may buy it for 10%, or return it | Between the two | Flexibility at a known price |
With an FMV lease, the final price isn’t known when you sign. The lessor prices the payment on its own residual estimate, and the buyout is set at the end. A 10% PUT works like a $1 buyout with a $5,000 balloon on a $50,000 machine. Read the end-of-term clause carefully. The labels vary by lessor, and the contract wording governs.
Section 179 and leased equipment
Section 179 lets a business deduct the cost of qualifying equipment in the year it’s placed in service, instead of depreciating it over several years. According to IRS Publication 946 (checked October 29, 2026), the maximum Section 179 deduction for tax years beginning in 2026 is $2,560,000. The limit is reduced dollar for dollar once the total cost of Section 179 property placed in service that year goes over $4,090,000. For 2025 the figures were $2,500,000 and $4,000,000.
Section 179 applies to property you buy. Some leases, often $1 buyout leases, may be treated as a purchase for tax purposes, while FMV leases are usually treated as rentals, with the payments deducted as an expense. Which treatment applies depends on the contract and your situation, so talk to a tax professional before you count on a deduction. For a farm-equipment example of the trade-off, see tractor lease vs buy.
Checklist before you sign
- Equipment cost, including delivery and installation if they are financed
- Number of payments, and how many are due at signing
- Rate or lease rate factor, and whether it is fixed
- End-of-term option ($1, FMV, 10% PUT or option) and the notice period for returning the equipment
- Fees, sales tax on payments, insurance and maintenance duties
- Early payoff and termination terms
Business leases aren’t covered by the consumer-lease disclosure rules, so get these terms in writing. If the equipment is a passenger vehicle, the auto lease calculator handles MSRP and money factor inputs.
Frequently asked questions
How do you calculate an equipment lease payment?
Subtract today’s value of the residual from the equipment cost, then divide by the annuity factor for the rate and term. For a quick estimate, use (cost − residual) ÷ months + (cost + residual) × money factor, which is what our lease calculator does.
What is a lease rate factor?
The monthly payment divided by the equipment cost. A factor of 0.0203 on a $50,000 machine means a payment of about $1,014 a month.
Is a $1 buyout lease the same as a loan?
Financially they are close. At the same rate and term, the payments are almost the same, as the comparison table shows. The differences come from the rate offered, advance payments, fees, and how the agreement is treated for tax and accounting.
What does FMV mean on an equipment lease?
Fair market value. At the end of the lease you can return the equipment, renew, or buy it at what it’s worth then. Payments are lower than on a $1 buyout lease, but the final price isn’t known up front.
Can I take Section 179 on leased equipment?
It depends on whether the lease is treated as a purchase. That is more likely with a $1 buyout lease. The 2026 limit is $2,560,000, per IRS Publication 946. A tax professional can confirm how your lease is treated.
Are lease payments made in advance or in arrears?
Many equipment leases are paid in advance, with the first payment due at signing. Advance payments are slightly lower: $1,007.09 vs $1,013.81 in the 60-month $1 buyout example.
Bottom line: The payment depends on the cost, the residual, the rate, the term and when payments are due. A $1 buyout costs about the same as a loan. FMV and 10% structures cut the payment but leave a cost or a decision at the end. Run each quote through the lease calculator, and compare it with a loan before you sign.