In this article
You need a machine for your business, and the leasing company gives you two choices with names that sound like a riddle: a "$1 buyout" or an "FMV" lease. Which one is right for you? This guide explains the difference between a $1 buyout lease and a fair market value lease in plain words, puts the two side by side, and helps you decide what to ask before you sign. The "$1" is just the name of the lease. It is not a price, and it is not a promise of what any lease will cost.
What do these two leases mean, in plain words?
A $1 buyout lease is a lease where you make payments for the length of the lease, and at the end you can buy the equipment for a token amount, often a dollar. In practice you are paying it off over time, and you end up owning it. It often works more like buying with payments.
A fair market value lease, or FMV lease, is a lease where you pay to use the equipment for a set time. At the end you can buy it for what it is worth at that moment, which is the "fair market value." You may also have other choices, such as returning it or renewing.
Same equipment, different deal. What changes is who owns it at the end, and how big the payments feel along the way.
$1 buyout vs. FMV lease: side by side
Here is how the two compare, point by point.
Who owns it at the end?
- $1 buyout: You do. You buy it for the token amount.
- FMV: The leasing company does, unless you choose to buy it at what it is worth then.
How do the payments feel?
- $1 buyout: Payments tend to be larger, because you are paying off the whole cost of the equipment over time.
- FMV: Payments often feel smaller, because you are not paying off the full cost. You are paying for the use of it.
What can you do at the end?
- $1 buyout: Buy it for the token amount and keep it.
- FMV: Usually you can buy it at its value then, return it, renew the lease, or swap to newer equipment. The exact choices depend on your agreement.
Who is it good for?
- $1 buyout: Owners who plan to keep the equipment for its whole working life.
- FMV: Owners who want lower payments, or who may want to upgrade when the equipment gets old.
What should you watch for?
- $1 buyout: Bigger payments mean you need steady income to cover them.
- FMV: The end-of-term price is not set at the start, so ask how "fair market value" will be worked out.
Which one fits my business?
Ask yourself these questions:
- Will I still need this equipment in a few years? If it will last and you will keep using it, a $1 buyout may make sense.
- Does the equipment get old or out of date quickly? Computers, medical tools and some machines are replaced often. An FMV lease can make it easier to upgrade.
- How tight is my monthly money? Lower payments may help cash flow, but think about the end of the lease too.
- Do I want to own it? Owning gives you something that belongs to the business. Leasing gives you flexibility.
Example only: A small print shop owner needs a large printing machine that should last for many years. She plans to keep it. A $1 buyout lease may suit her because she ends up owning it. A dental clinic that wants the latest scanner every few years may prefer an FMV lease. Your situation will be different.
Questions to ask before you sign
- How is the end-of-term price set? For an FMV lease, ask how fair market value will be decided and by whom.
- What are my choices at the end? Buy, return, renew or upgrade? Ask for them in writing.
- What is the total I will pay over the whole lease? Add every payment and every fee.
- What happens if I want to end early? See our guide on prepayment penalties for what to look for.
- Who looks after repairs and insurance?
- How will this appear in my books and taxes? Ask your accountant. Leases can be treated in different ways.
What about buying with a regular loan?
A third path is to borrow money and buy the equipment outright from day one. Our guides on equipment financing vs. leasing and new vs. used equipment financing can help you compare. If you want to understand how owning equipment may affect your taxes, read about the CCA deduction for equipment, and speak with an accountant for your own situation.
Common mistakes to avoid
- Picking only by the monthly payment. Look at the total cost and the end-of-term choices.
- Not reading how "fair market value" is worked out.
- Assuming a lease is always cheaper than buying. It depends.
- Forgetting the end of the lease. The decision at the end is part of the deal.
- Signing without comparing at least two offers. Our scorecard for comparing offers helps.
- Skipping your accountant. Different leases can be treated differently for tax.
Ready for the next step?
If you are choosing between leases and want to see what could fit, you can book a short call with our team. Tell us about the equipment and how long you plan to use it, and we will talk through your options in plain words. You can also learn about equipment financing or read the complete guide to equipment financing.
This post is general information to help you understand your options. It is not personal financial, legal or tax advice. Details, rates and rules can change, so check the latest information before you decide.
