01
The trade clears the balance
The best case. The trade value settles the facility with a surplus, and the surplus becomes the deposit on the replacement, reducing the amount financed.
Guide
The end of the term, planned rather than arrived at.
Most equipment is replaced before its finance ends, which means the interesting question is not what happens at the end of the term but what happens when the term and the replacement do not coincide.
MS
Matt Stiles Editor
Published 7 September 2026 Last reviewed 7 September 2026 Read time 10 min
The short version
Four things that decide the end of a term.
- Value falls faster than the balance early on. Depreciation is front-loaded while the balance reduces evenly, so a machine traded early frequently owes more than it is worth.
- A rolled shortfall raises the cost of the next machine. It is offered readily and it is not free. Repeated across a fleet on a cycle, the effect compounds.
- A residual is a decision, not a discount. The lower payment on a lease defers a lump sum to the end. Knowing which of the three options will be taken before signing is what makes the structure work.
- The term should equal the replacement cycle. A term running past the point a machine is replaced is the most common avoidable cost in equipment finance.
The mechanism
Why equity is negative before it is positive.
An amortising facility reduces its balance on a fixed schedule, roughly evenly across the term with slightly more principal repaid later. Equipment does not lose value that way. Most plant, and commercial vehicles in particular, lose more value in their first years than in their last.
Those two lines do not track each other. For a period at the start of a term, the machine is worth less than the balance owing, which is what negative equity means. Time closes the gap, because depreciation slows while the balance keeps falling at the same rate, and a deposit closes it faster by starting the balance lower.
This is not a defect in the product and it is not a lender doing anything unusual. It is the ordinary consequence of two different curves, and it matters because it decides what happens when a business wants to replace a machine before the facility ends, which is the common case rather than the exception.
Balance reduces
Evenly, by schedule
Value falls
Fastest at the start
Result early on
Owing more than it is worth
What closes the gap
Time, or a deposit
The three structures
What actually happens at the end.
The end of a term differs more between structures than the start does, which is why the structure decision is really a decision about the ending.
| Structure | At the end of the term | The decision required | What it suits |
|---|---|---|---|
| Hire purchase | Title transfers, the business owns it | None, unless replacing early | Machines kept well past the term |
| Chattel mortgage | The mortgage is discharged | None, unless replacing early | Machines kept well past the term |
| Finance lease | The residual falls due | Settle, refinance, or return | Replacement on a known cycle |
| Operating lease | The machine goes back | Return it in the agreed condition | Equipment that will not be kept |
What each structure requires at the end of its term.
Replacing early
Four ways a mid-term replacement is handled.
All four are ordinary and offered routinely. They differ in what they cost, and the difference is not always visible in the weekly figure on the new agreement.
02
The trade covers the balance exactly
Clean, and it leaves nothing toward a deposit. The replacement is financed in full, which is fine where the business has headroom.
03
The shortfall is paid
The business puts cash in to clear the gap. It costs money now and keeps the new agreement clean, which is frequently the cheapest of the four.
04
The shortfall is rolled forward
Added to the new facility. Offered readily and easy to accept, and it means the new machine is financed for more than it cost, at interest, for the whole new term.
The compounding one
A rolled shortfall does not stay behind.
Rolling a shortfall into the next agreement is normal, is offered without fuss and is commonly the option taken, because it requires no cash on the day. What it does is finance the previous machine’s remaining loss across the whole term of the next one, at interest. Do it once and the effect is modest. Do it on every replacement across a fleet on a rolling cycle, and each new facility starts further behind than the last, which is how a replacement programme becomes progressively more expensive without any single decision looking wrong. The businesses that avoid it track the equity position on each machine and choose which units to trade rather than being told.
Residuals
A lower payment now, and a decision later.
What a residual is
Value not repaid across the term.
On a finance lease a residual amount is set at inception and is not amortised across the term, which is why the payment is lower than the equivalent hire purchase. The residual then falls due at the end, and it is settled, refinanced, or the machine is returned.
The lower payment is therefore not a saving. It is a deferral, and the amount deferred is known from the day the agreement is signed, which makes it entirely plannable and frequently unplanned.
What decides whether it works
Knowing which option will be taken.
A residual works well where the business knows in advance which of the three exits it intends. Returning the machine suits equipment that will be replaced anyway. Settling suits a machine the business wants to keep and has planned for. Refinancing is the option taken when neither was planned, and it is the most expensive of the three.
The problem arises when the residual arrives as a surprise. A business that budgeted for the payment and not for the ending finds a lump sum due on a machine it needs, and refinances it because that is the only option left. Knowing the number and the date at signing removes that entirely.
Worked scenarios
Three endings, illustratively.
Illustrative scenarios on stated assumptions. The figures are indicative and are produced by the calculator on this page.
A machine traded at four years on a five-year facility
The trade that funds the deposit
The business financed $110,000 over 48 months at an indicative 11%, carrying a repayment near $656 a week. At three and a half years the balance is low and the trade value exceeds it.
The surplus becomes the deposit on the replacement, which reduces the amount financed and typically improves the indicative rate offered on the new facility. This is what a well-timed replacement looks like, and the timing rather than the negotiation is what produced it.
Indicative figures
- Original amount
- $110,000
- Term
- 48 months
- Indicative weekly
- ~$656
- At trade
- Surplus becomes the deposit
The same machine traded at eighteen months
The early trade that does not clear
A lane change means the machine is no longer suitable and it is traded at eighteen months. Depreciation has been steep and the balance has barely moved, so the trade value falls short.
In this scenario the shortfall is rolled into the replacement, which is offered immediately and requires nothing on the day. The replacement is now financed for more than it cost, at interest, across a full new term. Nothing about that is unfair and it is entirely a consequence of the timing rather than the terms.
Indicative figures
- Traded at
- 18 months
- Equity position
- Negative
- Shortfall
- Rolled forward
- Effect
- The next machine costs more
A finance lease reaching its end
The residual that arrived as a surprise
A business took a finance lease for the lower weekly payment and did not plan for the residual. The term ends, the residual falls due, and the machine is still needed.
Returning it is not an option because the work depends on it, and settling it requires cash the business did not set aside. It refinances the residual, which is the most expensive of the three exits and the one taken by default. Knowing the number and the date at signing would have made either of the other two available.
Indicative figures
- Structure
- Finance lease
- Residual
- Known from day one
- Options available
- Three
- Option taken
- The most expensive
Settling early
What it costs to end a facility ahead of time.
Ending a facility early is a different question from trading a machine, and the two get conflated. Where a business simply wants the debt gone, the position depends on what the agreement says, and New Zealand equipment facilities vary considerably on this point.
Some allow additional payments and early settlement without cost, which makes paying down a facility with surplus cash a straightforward decision. Others carry an early settlement fee, and some fixed-rate agreements carry a break cost calculated by the lender to reflect the interest it expected to receive. A break cost on a fixed-rate facility settled early in its term can be substantial, and it is entirely legitimate: the rate was fixed on the basis of a term the borrower is now shortening.
The practical point is that this is knowable at signing and is rarely asked about then, because early settlement feels like a good problem to have. Asking what early settlement would cost at year two, before signing, takes one question and removes the possibility of an unwelcome number appearing at the moment a business has cash available and wants to use it well.
Keeping a cycle healthy
Three habits that keep replacement costs flat.
01
Set the term to the replacement cycle at the start
Where machines are replaced at four years, a four-year term is right even though a five-year term shows a lower weekly figure. The lower figure on the longer term is the cost of the mismatch, deferred rather than avoided.
02
Track the equity position on each unit
Knowing which machines are in positive equity turns a replacement decision into a choice rather than an acceptance. A business that knows can trade the units that fund their own replacements and hold the ones that do not.
03
Decide the ending before signing the beginning
On a lease, that means knowing which of the three exits will be taken and having the residual amount and date recorded somewhere it will be seen. On a hire purchase it means knowing whether the machine will outlast the term.
The upgrade offer
Why a replacement is offered before the term ends.
Dealers and financiers frequently approach a business partway through a term with an upgrade proposal, and the timing is not arbitrary. It usually arrives when the equity position has just turned positive, which is the earliest point at which a trade can be presented as costing nothing.
That is a legitimate offer rather than a trick, and it is worth understanding what it does. Trading at the point equity first turns positive captures the smallest possible surplus, resets the term to its full length and starts a new period of front-loaded depreciation. Trading a year later captures considerably more and leaves the business a year further through its cycle.
Neither is wrong, and the useful question is whether the replacement is being driven by the machine or by the offer. Where the current machine is genuinely at the end of its useful life for the business, the timing of the approach is irrelevant. Where it is working perfectly well, an upgrade taken because it was offered rather than because it was needed is the most common way a replacement cycle shortens without anybody deciding it should.
Test the maths
The term decision, in weekly numbers.
Running the same amount over the replacement cycle and over a longer term shows what the mismatch costs. Indicative only, and not a quote or offer of credit.
Indicative repayment
Weekly
$656/week
$2,843 /month $26,464 total interest
$110,000
$5,000 $500,000
4 years
6 months 5 years
11.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $110,000 scenario
4 years at 11.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
References
Sources
- Inland Revenue depreciation rate finder
The published source for the depreciation position and for the adjustment on disposal.
- Inland Revenue, GST
The published source for the GST treatment on a disposal or trade-in.
- Personal Property Securities Register
Where a discharge is recorded when a facility is settled at trade.
- Personal Property Securities Act 1999
The statutory basis for the security discharge described at settlement.
- Reserve Bank of New Zealand, statistics
Context for the indicative rates used in the worked scenarios.
FAQ
Questions, answered
What is negative equity on financed equipment?
It means the balance owing exceeds what the machine is worth. It is common in the first part of a term because depreciation is front-loaded while the balance reduces roughly evenly. Time closes the gap, and a deposit closes it faster by starting the balance lower.
What happens if a trade-in does not clear the balance?
The shortfall is either paid in cash or rolled into the new agreement. Rolling it forward is offered readily and requires nothing on the day, and it means the replacement is financed for more than it cost, at interest, across a full new term. Paying it is frequently the cheaper of the two.
Why does rolling a shortfall matter on a fleet?
Because it compounds. Done once the effect is modest. Done on every replacement across a fleet on a rolling cycle, each new facility starts further behind than the last, and a replacement programme becomes progressively more expensive without any single decision looking wrong.
What is a residual, and is it a discount?
A residual is an amount set at inception on a finance lease that is not repaid across the term, which is why the payment is lower. It is not a discount, it is a deferral, and it falls due at the end where it is settled, refinanced, or the machine is returned.
What are the options when a residual falls due?
Three. Settle it and own the machine, refinance it over a further period, or return the machine. Which is best depends on whether the machine is still needed and whether the money was set aside, and the worst outcome is having the decision made by default because neither was planned.
How long should a finance term be?
The same length as the replacement cycle. A term running past the point a machine is replaced means paying for something already traded while paying for its replacement, and a term ending well before the machine is retired leaves value unfinanced that could have supported cash flow. Matching them removes both problems.
Does trading a machine create a tax consequence?
Selling or trading an asset for more or less than its depreciated book value produces a tax adjustment in the year of disposal, subject to the accountant’s confirmation. It is a real consequence of an upgrade that is easy to overlook when attention is on the replacement, and it is worth raising before the trade rather than after.
Can a facility be settled early?
Usually, and the terms vary. Some agreements allow additional payments or early settlement without cost, and others carry an early settlement fee or a break cost on a fixed rate. The agreement is the authoritative reference, and it is a question worth asking before signing rather than at the point of wanting to settle.
What condition must equipment be in when returned on an operating lease?
The agreement sets a standard, commonly described as fair wear and tear with specific exclusions, and it is worth reading before the machine goes back rather than when it does. Charges on return for condition or for excess use are a real cost that is easy to be surprised by.
Is it better to keep a machine past the end of a hire purchase?
Where the machine still works well and the maintenance cost is predictable, keeping it costs nothing and is frequently the best return in a fleet. The argument for replacing is reliability, capability or an equity position that funds the next machine, and none of those is age by itself.
How can a business know its equity position?
The balance owing comes from the financier and can be requested at any time. The market value comes from a dealer appraisal or from observing what comparable machines are selling for. Doing that once a year across a fleet takes very little effort and turns replacement decisions into choices.
Why is an upgrade offered before the term ends?
Usually because the equity position has just turned positive, which is the earliest point at which a trade can be presented as costing nothing. It is a legitimate offer, and it captures the smallest possible surplus while resetting the term and starting a new period of front-loaded depreciation. Whether to take it depends on the machine rather than on the timing of the approach.
What does early settlement cost?
It depends entirely on the agreement. Some allow additional payments and early settlement at no cost, others carry a settlement fee, and some fixed-rate facilities carry a break cost reflecting interest the lender expected to receive. Asking what settlement at year two would cost, before signing, takes one question and removes an unwelcome surprise later.
Does a residual need to be paid in cash at the end?
Not necessarily. It can be settled from cash, refinanced over a further term, or avoided by returning the machine where the structure allows. Having decided which of those will happen, and having the amount and date recorded somewhere visible, is what keeps the choice open.
Related
Keep reading
How equipment finance works in NZ
The structures whose endings this guide describes.
Read onPlant and machinery depreciation
The disposal adjustment that comes with a trade-in.
Read onDealer against private sale
Why an outgoing machine with finance owing usually needs a dealer.
Read onTransport equipment finance
The sector where the equity position across a fleet matters most.
Read onIT and technology finance
The class where matching the term to the refresh cycle matters most.
Read on