What Is an Equipment Loan?
You have been behind the wheel for years. Maybe you are finally ready to go out on your own as an owner-operator. Or maybe you already have your authority and you are looking at upgrading your rig. Either way, you need to know the difference between a loan and a lease before you sign anything.
At Majha Capital, we finance trucks, trailers, and commercial equipment every day. We have seen owners get this decision right and we have seen it go sideways. This guide breaks down both options in plain language so you can make the call that actually fits your business.
A commercial truck loan, also called equipment financing or an Equipment Finance Agreement, means you borrow money to buy the truck outright. A lender provides the cash, you pay the vendor, and you own the truck from day one. The lender typically holds the title until your final payment clears.
- Down payment of 10 to 20% of the truck's purchase price
- Term of 36 to 84 months (3 to 7 years)
- Interest rates generally 6% to 35% and up, depending on credit and lender
- At end of term: you own the truck free and clear, no further payments
- Every dollar paid builds equity in your asset
Same idea as a home mortgage. You pay it off over time and at the end it is yours. Sell it, trade it in, or keep running it payment-free. Nobody can take it from you.
| Credit Score Range | Typical APR | What Lenders See | Approval Odds |
|---|---|---|---|
| 720+ | 6% to 12% | Excellent, top-tier borrower | Very High |
| 670 to 719 | 10% to 18% | Good, standard commercial | High |
| 620 to 669 | 15% to 25% | Fair, higher risk tier | Moderate |
| 580 to 619 | 22% to 35% | Poor, hard money lenders | Low to Mod |
| Below 580 | 35%+ | Very poor, few options | Very Low |
| Loan Term | Monthly Payment | Total Interest Paid | Best For |
|---|---|---|---|
| 36 months (3 yr) | Highest | Lowest | Pay it off fast and save on interest |
| 48 months (4 yr) | Moderate to high | Low | Balance of payment and interest |
| 60 months (5 yr) | Moderate | Moderate | Most common for semis |
| 72 months (6 yr) | Lower | Higher | Cash flow management |
| 84 months (7 yr) | Lowest | Highest | Max cash preservation |
Example based on a $135,000 loan at 9% APR. A 60-month term is the industry sweet spot for most owner-operators.
| Lender Type | Best Credit Range | Speed | Notes |
|---|---|---|---|
| Banks & Credit Unions | 680+ | Slower (1 to 2 weeks) | Best rates, need strong history |
| Equipment Finance Companies | 620+ | Fast (2 to 5 days) | Specialize in trucks, flexible |
| Captive Financing (OEM) | 640+ | Fast (at dealership) | Often promos for new trucks |
| Online/Alt Lenders | 580+ | Very fast (1 to 2 days) | Higher rates, easier approval |
| SBA 7(a) Loans | 650+ | Slowest (weeks) | Long terms, low rates, lots of paperwork |
What Is an Equipment Lease?
In a lease, the leasing company owns the truck. They are letting you use it in exchange for monthly payments. You are paying for the truck's use, not its full ownership.
Leases come in several flavors, each with different end-of-term options and tax treatments:
| Lease Type | Own at End? | Monthly Payment | Tax Treatment | Best For |
|---|---|---|---|---|
| TRAC Lease | Optional | Lowest | Full payment deductible | Fleets, uncertain future |
| FMV Lease | Optional/FMV | Low | Full payment deductible | Upgrading every 3 to 4 yrs |
| $1 Buyout | Yes, just $1 | Higher | Depreciation + interest | Plan to own, lower credit |
| Component | Typical Value | Notes |
|---|---|---|
| Upfront payment | 1 to 2 months rent + deposit | Lower than loan down payment |
| Term | 24 to 60 months | Shorter terms more common vs. loans |
| Residual value | 15 to 40% of truck value | Set at signing, determines monthly payment |
| Mileage limit | Often 100k to 150k/yr | Overage fees apply per mile |
| Maintenance | Often included | Reduces surprise repair bills |
| End-of-term options | Buy / Return / Renew | TRAC also allows gain sharing |
Side-by-Side Comparison
Here is every major factor laid out in one place. Hover or tap any row for more detail.
| Factor | Loan (Buy) | Lease |
|---|---|---|
| Who owns the truck? | You do (lender holds title until paid) | Leasing company |
| Down payment | 10 to 20% of purchase price | Often just first month + deposit |
| Monthly payment | Higher (paying full value) | Often lower (paying depreciation only) |
| Mileage limits | None, drive as much as you want | Often restricted, fees if exceeded |
| Customization | Full freedom, it's your truck | Limited, lessor's rules apply |
| End of term | Own the truck free and clear | Return, buy at residual, or renew |
| Building equity | Yes, every payment builds ownership | No equity unless you buy at end |
| Tax deduction | Depreciation + loan interest | Full lease payment as operating expense |
| Maintenance | Your responsibility | Often included in lease packages |
| Early exit | Sell or trade truck | Expensive, termination fees apply |
| Credit needed | Generally 670+ preferred | More accessible with imperfect credit |
| Balance sheet | Asset + liability (both sides) | Off-balance-sheet (TRAC/FMV leases) |
At a Glance: Which Option Wins Each Factor?
Chart shows relative advantage per category, not a universal score. Your situation determines the real winner.
The Money Question: Which One Costs More?
Most drivers get tripped up here. A lease looks cheaper because the monthly payment is lower. But lower monthly payments don't always equal a better deal over time.
"Over many years, the total you pay through leases can easily exceed what you would have spent buying the same truck. The payments never stop and you walk away with nothing."
With a loan, you pay more each month but you are building an asset. Once paid, it is yours, no more payments. With a lease, you may pay less monthly, but you are always making a payment as long as you lease, and you never accumulate the asset's value.
Real-Numbers Example: $150,000 Truck
60-month comparison: loan vs. TRAC lease
What Happens When You Run High Miles?
Lease agreements typically include mileage caps, often 100,000 to 150,000 miles per year. Long-haul drivers who run 150,000 or more miles annually face painful per-mile overage fees that can wipe out any savings from the lower monthly payment.
| Annual Miles | Loan Impact | Lease Impact | Recommendation |
|---|---|---|---|
| Under 80,000 | No impact | Within typical limits | Either works |
| 80,000 to 120,000 | No impact | Near limits, check terms | Check lease terms |
| 120,000 to 150,000 | No impact | Likely at or over limit | Lean Loan |
| 150,000+ | No impact | Significant overage fees | Loan recommended |
What About Taxes?
This is where loans can have a real edge, especially under current law. When you buy a truck with a loan, you can use Section 179 to deduct the full purchase price in the year you put the truck in service.
| Tax Strategy | Available with Loan? | Available with Lease? | Year 1 Impact (on $200k truck) |
|---|---|---|---|
| Section 179 Deduction | ✅ Yes, full purchase price | ❌ No (you don't own it) | Up to $42,000 saved at 21% |
| Bonus Depreciation (100%) | ✅ Yes, restored 2025 | ❌ No | Up to $42,000 saved at 21% |
| Regular MACRS Depreciation | ✅ Yes (5 to 7 yr schedule) | ❌ No | ~$6,000 to $8,000/yr saved |
| Lease Payment Deduction | ❌ No lease payments | ✅ Full payment deductible | ~$5,000 to $6,000/yr saved |
| Loan Interest Deduction | ✅ Interest portion only | ❌ Not applicable | ~$2,000 to $4,000/yr (varies) |
| Truck Purchase Price | Tax Rate | Year 1 Deduction | Estimated Tax Savings (Year 1) |
|---|---|---|---|
| $100,000 | 21% | $100,000 | $21,000 |
| $150,000 | 21% | $150,000 | $31,500 |
| $250,000 | 21% | $250,000 | $52,500 |
| $350,000 | 21% | $350,000 | $73,500 |
| $500,000 | 28% | $500,000 | $140,000 |
Assumes truck is placed in service in Year 1 and business income is sufficient to absorb the deduction. Consult a CPA for your specific situation.
What Happens If Things Go Wrong?
Most drivers don't think about the downside until it's too late. Here is what happens in both cases when things don't go as planned.
- Lender has a security interest in the truck as collateral
- They can repossess the truck if you default
- Credit score takes a major hit
- Any equity you've built may be recovered through sale
- You may still owe a deficiency balance if truck sells for less than owed
- Lessor (owner) has strong right to recover the truck immediately
- You lose the truck AND every payment you've made
- "Hell or high water" clauses require payments no matter the truck's condition
- Early termination can mean owing all remaining payments
- Security deposit is lost
Early Exit Comparison
| Early Exit Scenario | Loan Option | Lease Option |
|---|---|---|
| Sell the truck | Yes, pay off loan and keep equity | No, you don't own it |
| Trade in for upgrade | Yes, equity applied to new deal | Possible, but may owe early term fees |
| Business closes | Sell or repossess truck, settle balance | Owe all remaining payments plus fees |
| Can't make payments | Voluntary repossession, negotiate | Lessor can recover truck and you owe balance |
| Truck totaled | Insurance covers, may owe gap | Insurance covers residual, "HoHW" still applies |
Common Risk Questions
Which Is Better for You?
There is no single right answer. Everything depends on your credit, driving pattern, how long you plan to be in the game, and your financial goals. Use the information below as a starting point.
- Plan to own and run the same truck for 5+ years
- Want to build equity and own an asset free and clear
- Run high miles and don't want mileage restrictions
- Want to customize your rig (paint, sleeper, specs)
- Have decent credit (670 or better) and can handle a larger down payment
- Want to take advantage of Section 179 or bonus depreciation
- Value the ability to sell or trade in at any time
- Are just starting out and need lower upfront costs
- Want predictable payments and maintenance coverage
- Like upgrading to newer equipment every 3 to 4 years
- Have limited or imperfect credit history
- Aren't sure yet how long you'll be an owner-operator
- Run regional routes with predictable, lower annual mileage
- Prefer simpler tax treatment (deduct payments as expense)
Quick Self-Assessment
Answer these four questions and see which way you lean:
Watch Before You Sign
The equipment finance industry funds nearly $1 trillion in business equipment every year. Professional lenders know these contracts inside and out. You need to know them too. The monthly payment is just one piece of a much bigger picture.
| Contract Element | Why It Matters | Red Flag to Watch |
|---|---|---|
| Total payments over full term | True cost of the deal | Total exceeds truck's market value by 50% or more |
| Mileage caps & overage fees | Lease-specific, major cost driver | Anything over $0.15/mile is steep |
| Early termination clause | What you owe if you exit early | "Remaining payments due immediately" |
| "Hell or high water" language | Payments due no matter what happens | Any clause requiring payment regardless of truck condition |
| Maintenance responsibility | Who pays for repairs | Lease that says maintenance "included" but has exclusions list |
| Residual / buyout amount | What you'll pay to own at end | Residual set too high (no incentive to buy) |
| Insurance requirements | Minimum coverage you must carry | Forced comprehensive on aging truck |
| Default provisions | What triggers default & consequences | Single missed payment = default clause |
| Personal guarantee | Your personal liability | Unlimited personal guarantee on all obligations |