What is a disadvantage of leasing compared to purchasing equipment outright?

Leasing equipment often results in a higher overall cost compared to purchasing it outright due to factors such as interest payments and depreciation. When a business leases equipment, it typically pays interest on the lease amount, which can add significantly to the total cost over the lease term. Additionally, the lessor (the company that owns the equipment) will account for a depreciation schedule, which also factors into the overall cost of the lease.

In contrast, if a business purchases equipment outright, it has the advantage of owning the asset and potentially benefiting from its full value. Once the equipment is paid off, the ongoing costs are greatly reduced to maintenance and operation, rather than ongoing payments. Furthermore, ownership allows the business to claim full depreciation on its taxes, while lease payments may not invoke the same level of tax benefits depending on the lease structure, influencing the overall financial impact.

By understanding that leasing, while providing lower initial cash outflows, can lead to higher cumulative costs, especially when considering interest and depreciation, it's clear why this choice is a significant disadvantage.