Purchasing a new tractor is something every farmer across the country would love to be able to do.

The reality is a new tractor is a luxury item and it’s easy to see why at current prices.

Most farmers enjoy the idea of new machinery. There’s a lot to be said for having good plant, that can make jobs easier and faster.

However, in terms of a return on investment, tractors would be a long way down the list. Sometimes an investment like this is needed, particularly on farms that do a lot of hours each year on tractors.

New tractors are expensive; you can forecast a cost of roughly €1,000 including VAT for every unit of horsepower the tractor has. This obviously varies, but it’s a good guide to start with.

Second-hand tractors are the only real option for a lot of farming businesses that want some return on investment.

In terms of purchasing a new machine, there are a few options available in terms of finance such as hire purchase, leasing or a farm loan for purchase.

For the basis of the comparison, we’ll look at a 120hp tractor with a front loader. This is a common type of tractor on Irish farms. In terms of price, you’re looking at roughly €120,000 including VAT.

Hire purchase

In hire purchase, the farmer typically pays a deposit on the machine, usually to the value of 20% to 50% of the cost upfront. The remaining costs and interest are then paid over an agreed term, with options for monthly or seasonal payments.

This term varies on each individual case, but typically it’s done over a two- to five-year period. With hire purchase, on paper you only own the machine once it’s purchased outright at the end of the term.

As the machine is in the farm's name, the farmer is able to claim capital allowances on it, which allows you to depreciate the value of the machine over an eight-year period at 12.5% per year, thereby reducing your tax liability.

With hire purchase, the full amount of the VAT can be recovered on purchase. Another advantage of this method is when a farmer decides to trade in their tractor in the future, they won’t be hit with a tax bill, which is the case when leasing.

Interest rates on hire purchase are fixed at the start of an agreement. Some companies will offer 0% interest on the repayment costs, but this typically means the upfront cost will be more expensive.

If you have the option of trading a tractor in to offset the initial deposit, hire purchase could be a good option for the business.

Finance leasing

This is often an option for farmers starting off, with little to no upfront cash or a tradeable tractor to act as a deposit.

You are essentially leasing the tractor off whomever finances the deal.

These payments can be cheaper than hire purchase payments, but in this scenario, the farmer doesn’t become the owner of the tractor. Therefore, you can’t write off the cost of the tractor as you can with other options.

Another disadvantage of leasing is that if you decide to trade in the tractor in the future, the value of the trade in will be taxable, as it is earnings.

Lease payments are made over a fixed term, usually two to five years again. The big selling point of leasing is there is no need for a big initial capital outlay. You are also tied into shorter contracts, so upgrading regularly is an option.

Bank loans

The other option is a standard bank loan. This a nice option where you have borrowing capacity. Payments are made on a recurring basis with interest included. Interest rates are typically 5% to 7% on these loans.

This purchasing option means the tractor is yours from day one, giving the owner the capital allowance benefits of writing off the cost of the machine over the eight years. Banks will typically require some equity from the farmer, usually between 10% and 20%.

Second-hand tractors

A used low-hours tractor could be a good option on farms doing less than 600 hours per year on a tractor. They definitely have their place on a dairy farm, in particular on those who use contractors for most of their work.

Conclusions

If you’re looking at purchasing a tractor this year, either new or second-hand, it’s important to do your background research. Don’t jump into a purchase just because there’s some cash available, especially at the current milk prices.

Up-front purchase is the ideal scenario, as you won’t face interest costs. However, this would require a large capital outlay which can be hard to justify.