Equipment Loan Agreement: Your Step-by-Step Guide

Updated on October 28, 2020
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Equipment Loan Agreement: What You Need to Look For

An equipment loan agreement is a document that delineates all of the details of your equipment loan. Once you sign your equipment loan agreement, you are legally obligated to adhere to all the details that the lender included in the body of the document. Whether it’s a pesky fee hidden in the fine print or an overarching legal intricacy about how you can handle your equipment, each detail in your equipment loan agreement is important to parse through.

As you review your equipment loan agreement, you’ll need to check and confirm the following details:

  1. Type of equipment loan
  2. Ownership
  3. Loan amount
  4. Repayment term
  5. Repayment schedule
  6. Interest rate, APR, and total cost
  7. Prepayment penalties
  8. Penalty fees
  9. Maintenance costs
  10. Alterations or improvements
  11. Insurance
  12. Definition of default
  13. Variable vs. fixed interest
  14. Miscellaneous fees

Whether you consult sample business loan agreements, equipment loan agreement templates, this guide to equipment loan agreements, or all of the above, it’s prudent to seek oversite from a legal professional before you sign onto your equipment loan debt.

Nonetheless, it certainly helps to get an overview of equipment loan agreements before taking your questions to your lender and/or lawyer. You can use this guide to help you better understand your equipment loan agreement.

Equipment Loan Agreement: 14 Details to Check Before Signing

Before anything, you need to check in on the tenants of your equipment loan agreement. Diving into the fine print on your this type of business loan agreement is important, sure, but the following basics are the first things you’ll need to check up on.

Do they match the features of the business loan that you discussed with your lender? Or are there discrepancies between what you see on your equipment loan agreement and what you were lead to expect of your equipment loan?

Here are the first six things you need to pore over in your equipment loan agreement.

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1. The Type of Equipment Loan

First, you’ll need to make sure that you’re signing onto the type of equipment loan that you think you are. The type of equipment loan you’re signing on to should be clear in the body of your equipment loan agreement. Plus, you should be familiar with what the name of your equipment loan type actually means what you think it does. First, you’ll need to verify whether or not you’re leasing or financing your equipment. Alternatively, in some cases, your equipment loan might be a mix of both leasing and financing, so be sure to keep an eye on terminology within your equipment loan agreement.

There are many types of equipment loans out there, each with varying ownership and buy-out structures. Here are the five most common forms of equipment loans that you might be taking on when you sign your equipment loan agreements:

  • Finance lease/$1 buyout
  • Sale/Leaseback
  • True lease/operating lease
  • PUT option lease

Whatever type of equipment loan you’re considering taking on, the structure will have serious implications on ownership and payback schedule. Be sure to read up on the type of equipment loan you’re about to take on before signing your equipment loans.

2. Who Owns the Equipment

You should make sure you’re clear on who will actually, legally own the equipment you’re about to finance. In some cases, your lender will be the formal owner of the equipment you’re financing, which will have distinct financial and legal repercussions. For instance, if the lender owns the equipment, you might not be able to alter it. On the other hand, if you’re the formal owner of the equipment, your equipment loan agreement might also require that you pay for insurance for the equipment.

3. Loan Amount

It might seem obvious, but it’s worth emphasizing—the equipment loan amount is one of the most important things you’ll need to verify on your equipment loan agreement. Ensure that the loan amount on your equipment loan agreement is what you discussed with your lender. If there’s a discrepancy between the amount on your equipment loan agreement and the amount you discussed with the lender, then it’s certainly worth checking in with them about it.

4. Repayment Term Length

Many equipment loan providers say that their repayment term lengths will typically be the projected life span of the equipment in question. Because this is a pretty subjective measurement of time, t’s crucial to verify the actual length of your loan repayment terms before you sign your equipment loan agreement. Generally speaking, the longer your repayment term, the better—a lengthier repayment period will mean lower payment amounts.

However, if you’re hoping to pay as little interest as possible, then a shorter repayment term might be a better fit for you, even if it means that your scheduled payments might be more frequent and/or in higher amounts.

5. Repayment Schedule

Your payment schedule will be contingent on your repayment term, another crucial feature to verify in your equipment loan agreement. You payment schedule will determine how frequently you’ll need to make payments towards your debt, and in what size payments you’ll need to do so.

Whether your equipment loan agreement delineates a daily, weekly, biweekly, or monthly payment schedule, be sure you know what you’re signing onto.

6. Interest Rate, APR, and Total Cost

There are many ways to measure how expensive your equipment loan will be, but three of the most common will be the interest rate and the APR attached to your equipment loan.

While the interest rate indicates how much interest you’ll accumulate on your equipment loan, the APR will indicate the total annual cost of your equipment loan. The total cost of your equipment loan will indicate the total amount of interest and fees you’ll have to pay on top of the principal loan amount that you borrowed.

Be sure to consult an equipment loan calculator to see all of the different ways to measure the cost of your equipment loan offer before you sign your equipment loan agreement.

7. Prepayment Penalties

Check your equipment loan agreement to see whether your equipment loan comes with prepayment incentives or prepayment penalties. If your equipment loan agreement cites prepayment penalties, then you won’t necessarily be able to save money on avoided interest if you pay down your debt ahead of schedule.

If you take on a non-amortizing equipment loan, then you’ll be on the hook for the total amount owed, even if you’re able to pay down your debt early. This is how a prepayment penalty will typically look in practice.

8. Penalty Fees

Your lender might also tack on indeterminate fees called “penalty fees.” If they do charge penalty fees, then your lender should delineate in what circumstances and just how much in your equipment loan agreement.

9. Maintenance Costs

Who will cover the costs of the upkeep your equipment might need? Your lender should use a section of your equipment loan agreement to address this question in case it comes up as you use and pay down your equipment.

10. Alterations or Improvements

Your equipment loan agreement should also clarify if you’ll be allowed to make alterations or improvements to the equipment you’re accessing through the proceeds of the loan.

11. Insurance

Some lenders might require borrowers to cover the cost of insurance for any equipment they access through an equipment loan. As such, your equipment loan agreement should address whether or not your lender will require this investment on your part.

12. Definition of Default

Your equipment loan agreement should solidify what your lender defines default to mean. For instance,  some lenders will take a single missed payment seriously. Meanwhile, other lenders might only declare activity default if you can’t pay down any of your debt. Ideally, no definition of default will apply to you as you pay back your equipment loan, but it’s prudent to know exactly what standard you’re being held to before you sign your equipment loan agreement.

13. Variable or Fixed Interest Rate

If your equipment loan comes with a fixed interest rate, then the rate won’t shift with the market throughout your repayment term length. Conversely, if your equipment loan comes with a variable interest rate, then the rate will fluctuate with the market throughout your repayment term.

Your equipment loan agreement will confirm which of these two types of interest rates your equipment loan will carry.

14. Miscellaneous Fees

Finally, as you finish out reading the fine print on your equipment loan agreement, be sure to keep a keen eye out for any other fees that your lender could hit you with.

Your Equipment Loan Agreement Checklist

Now that we’ve made our way through all of the minutiae that you’ll need to check in on before you sign your equipment loan agreement, let’s condense everything into one summarizing checklist.

Granted, this list won’t be comprehensive for every equipment loan agreement—depending on what type of equipment loan and what type of lender you’re working with, you might need to check in on additional points in your equipment loan agreement.

That said, the following things are a great place to start while reviewing your equipment loan agreement before signing on:

  1. Ensure that you’re taking on the exact type of equipment loan you think you’re taking on.
  2. Whether it’s your lender, your company, or you, who technically owns the equipment in question should be clear in your equipment loan agree
  3. Verify your exact equipment loan amount.
  4. Verify the interest rate and total APR on your equipment loan.
  5. Double check your equipment loan repayment term length and payment schedule.
  6. Calculate and confirm the total cost of your equipment loan.
  7. Check the fine print in your equipment loan agreement for the following details:
  8. Prepayment penalties your lender might charge you for paying down your debt early
  9. Penalty fees and in what circumstance your lender might charge them
  10. Who will cover the maintenance costs for the equipment in question
  11. Whether you’ll be able to perform alterations or improvements on the equipment
  12. Whether you’ll be obligated to pay for insurance for the equipment
  13. How the equipment lender defines default in the equipment loan agreement
  14. Whether the equipment loan carries fixed or variable interest
  15. Any other miscellaneous fees your equipment lender might charge you
  16. Check in with your lender if you notice any discrepancies or have any questions before you sign your equipment loan agreement


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The Bottom Line

As you pore over the details on your equipment loan agreements, it might be tough to decode all of the loan terminology and jargon. Even if you’re fairly certain that you’re familiar with a concept that your equipment loan agreement mentions, be sure to do your research and ask your lender about it.

Much of the time, loan terminology will have a very specific meaning, so a general idea of its meaning can often be way off. Plus, the unending list of acronyms used in equipment loan agreements will require a bit of research. Keep vigilant with the vocabulary used in your equipment loan agreement as you comb through all of the number

The effort you put into parsing through your equipment loan agreement now will be very much worth it in the long run. Be sure to consult someone with legal experience when you come across something strange or incomprehensible in your equipment loan agreement, and follow up with your lender if any of the details are different from what you discussed with them. At the end of the day, you want to be familiar with all of the details that accompany any debt you take on.

Meredith Wood
Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email:
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