Leasing a computer

It sounds cost effective to rent but in the end you'll pay more and won't own the equipment.
 
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  • Updated:4 Mar 2005
 

01 .Introduction

Leasing-a-computer

In brief

  • Renting computer equipment is a good idea if you or your business is short of cash but you'll probably pay more in the long run.
  • Buying outright can be the most cost effective way to pay for computer equipment if you want to own it for a long time.
  • Renting or leasing computer equipment entitles some people and businesses to tax benefits.
  • Seek professional tax advice for your own individual situation.

Please note: this information was current as of March 2005 but is still a useful guide to today's market.


Forking out a lump sum of a couple of thousand dollars to upgrade your computer every few years can burn a big hole in your hip pocket. Renting or leasing technology equipment allows you to pay a lower initial cash amount and make monthly payments over a specified period of time while you use the system. It also means you can upgrade to the newest equipment whenever you want.

On the downside, a computer lease can be more expensive than paying for the goods upfront and you won't own the equipment after the term of the agreement is over.

So when is a computer lease a good idea?

We checked out some computer leasing companies to see:

  • What's involved
  • The advantages and disadvantages
  • How to work out whether it suits you or your business.

This article should only be used a guide. Consult a professional tax expert for your individual situation.

Tip

  • A Commercial Rental Agreement generally applies to leases for businesses.
  • Consumers should sign a Consumer Lease. Many companies appear to focus on business customers but it's worth asking if they also provide leases for home users.
  • The Consumer Credit Code (www.creditcode.gov.au) protects consumers with consumer leases.
 
 

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You've probably heard of a car or property lease. Computer equipment leases work similarly. The leasing company (lessor) effectively buys the computer equipment from the retailer and you pay an agreed amount each month over a specified period (usually 24, 36 or 48 months) to rent it. The lessor retains ownership of the computer equipment, even after the end of the contract. You may have the option to buy the computer equipment from the leasing company at an agreed price at the end of the contract period but the lessor may choose not to sell the goods.

To be eligible for a computer lease you must apply and be approved for a credit limit by a leasing company. You will need to provide basic personal, financial and employment details and consent to a credit check of your records. Once approved, the credit can be used with any retailer affiliated with the leasing company.

Most companies pre-approve credit and you may be able to apply from within stores. Retailers such as Bing Lee, Dick Smith Electronics and Harvey Norman advertise leasing schemes throughout their stores.

Unlike other forms of credit, a deposit isn't usually required for a computer lease - once you've paid the first month's rental you can take the equipment home.

At the end of the contract period, you usually have a choice of options:

  • You can return the equipment and stop making payments
  • Continue paying the agreed amount and keep using the equipment
  • Upgrade to new equipment and renew your contract under new conditions
  • Or offer to purchase the equipment from the lessor, depending on the company.

Some leasing companies



TABLE


Pros and cons

Pros

  • The latest equipment. Renting computer equipment allows you to easily upgrade to newer, faster technology during the contract period. Most contracts let you upgrade at any time, although Flexirent and RentSmart both suggest it's best to wait until you're at least two thirds of the way into your contract to get the best deal. Flexirent offers two types of upgrades - you can upgrade the CPU to boost your system's performance, or simply swap old gear for new, known as a 'trade up'. You usually won't be penalised for breaking your original lease but you may have to pay out the old contract or transfer the balance to your new lease.
  • Lower initial cost outlay. Leasing allows you to pay a small amount initially but take the equipment home immediately. You can factor the monthly payments into household or business budgets to avoid paying a lump sum. This can free up money for other expenses such as mortgage repayments, saving for a holiday or business costs. You may even be able to afford a better performing system by making smaller monthly payments instead of one large, upfront payment. Some leasing companies will let you choose the length of your rental term. The longer the rental term, the lower the monthly cost so you may be able to choose a contract period to match your budget. However, Flexirent recommends choosing a rental period to match the 'use-by' date of the equipment you're after rather than your budget.
  • Tax benefits. If you use leased computer equipment for work purposes, even at home, you're entitled to tax deductions on the rental costs. For example, if you use the computer solely for a home business you can claim 100 percent of the expenses. If you use the computer for work-related purposes 60 percent of the time, you can claim 60 percent of the costs. However, we recommend you speak to a tax advisor about what you're entitled to before you sign a contract. Paying for computer equipment upfront also entitles you to similar tax deductions - you may be able to claim a deduction on the decline in value of the computer based on the proportion of time you use it for work expenses. Again, talk to a tax expert for details.

Cons

  • Lack of ownership. Leasing contracts don't imply the right to own the equipment after the end of the contract period. You may have the option of making an offer to purchase the equipment but, depending on the terms and conditions of your contract, the lessor may not choose to sell. The leasing company bases its decision on what it believes the product is worth in the secondhand marketplace, known as Fair Market Value.
  • Misadventure. If something happens to the leased equipment, say the computer is stolen or it's infected with a computer virus, you must continue to pay out the term of the contract regardless of whether or not you're actually using the computer. Paying for insurance or a protection plan may be worthwhile. See What to watch out for, below.
  • Cancellation charges. If you want to cancel your contract before the expiry date you may have to pay out the term or else be charged a cancellation fee.
  • Cost. If you can't claim tax deductions, you'll pay more for the equipment through a leasing scheme.

What to look for

  • Bundles
    Some computer leasing companies allow you to bundle several pieces of hardware and software into one rental agreement. Flexirent allows up to 25 percent of the leased amount to be used for software, installation, network cabling or training. However, it may be better to buy software outright so that you own the licence at the end of the contract.
  • End of contract
    Make sure you know when your contract ends. Some leasing companies will continue to debit monthly payments until you cancel the contract.
  • Insurance protection
    Most leasing companies require that you insure the leased equipment against loss and other insurable risks for its full replacement value during the term of the contract. Some companies offer their own insurance or protection plans at an additional cost (usually a small percentage of the total leased amount). You may be able to have the equipment covered under your existing home and contents insurance policy. Check with your provider. Remember to add any insurance or protection costs into your monthly budget.
  • Warranty and support
    Computers are usually sold with a one-year manufacturer's warranty. Leased computers also include this standard warranty. Call your leasing company or retailer to have the system repaired or replaced under warranty. Some leasing companies recommend equipment be covered by an extended warranty. You may be able to factor this additional cost (usually a small percentage of the total leased amount) into the lease.
  • Your files and documents
    File storage and backup is your responsibility. You will need to remove all your personal files and any software you've bought and installed yourself before returning a leased computer. Very few leasing companies can help you transfer data from an old leased computer to a new one. We recommend buying an external hard drive to use to store all your personal files and documents. Alternatively, you can burn all your files to DVD or CD or transfer them to a portable storage device such as a USB key.

03.Cash, lease or loan: the figures

 

Joe wants a new desktop computer, LCD monitor and printer.

The total cost of the equipment is $1945. He uses it for work purposes three days a week so he can claim 43% of the cost of the equipment over three years in tax deductions. He earns $52,000 per year before tax.

How much will the equipment cost him per year over three years (with tax deductions) if he: 

Pays with cash:

  • Cost per year before tax: $648
  • Cost per year after tax: $561

Joe can claim $278 in tax deductions, reducing his taxable income to $51, 722 and providing a tax saving of $87 per year.

Takes out a $2000 personal loan with a fixed interest rate of 9.4% over three years:

  • Cost per year before tax: $748
  • Cost per year after tax: $647

Although he can claim $321 in tax deductions, Joe will pay more in this scenario because he has to repay his loan. He makes a tax saving of $101 per year but the interest he pays averages out at about $100 a year over the three-year life of the loan.

Signs a three-year leasing contract which will cost him $22 per week for three years:

  • Cost per year before tax: $1144
  • Cost per year after tax: $990

Joe can claim $491 per year in tax deductions, giving him a tax saving of $154 but this is still the most expensive option because he's paying $22 per week for the equipment.

NB: This example is for illustrative purposes.

Calculations are based on Joe's marginal tax rate, including the Medicare levy, of 31.5% and on equal depreciation over three years.

We haven't included opportunity costs or loss of interest on cash payments which may be worth considering. By spending your cash upfront you could forgo $50-100 in interest each year after tax.

The scenario doesn't include additional software such as antivirus software or an office suite. Nor does it include insurance or an extended warranty, which may be a good idea if you choose a leasing scheme.

For 'full' business situations, leasing may be a more attractive proposition.

Make sure you seek professional tax advice for your individual situation.