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How a lease payment is calculated

how a lease payment is calculated

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How a lease payment is calculated is a mystery to most people.  Typically, one gathers say three quotes and goes with the selects the apparent best combination of value and payment.

Suppose you get quotes for comparison. You request both, the cash purchase price and the lease payment. Since most industries are highly competitive, its common that sales people quote similarly valued cash prices.  Conversely, sales people offering similar cash prices, will offer widely varying lease payments.   I would be astonished to see three equipment vendors with the same cash price for similar items. But, I would be more surprise if the vendors offered the same lease rates, even if of the cash prices were all the same.  If you’ve received equipment quotes, you may have noticed  disparity between the prices and lease rates.   For example, how could a lower price calculate out to a higher lease rate, given the same lease terms across the board.    I’ll make some sense out of this disparity in the next paragraph.

Once you know how a lease payment is calculated, you have the secret tool

The rate factor for a given term is insider information.   The rate factor is often referred to as the periodic rate factor.    The important thing for you to know is that all lease payments are calculated. Lease payments are a product of the selling price and a specific rate factor.  Lease rates seldom change by an appreciable amount, so as to make one raise an eyebrow.   If you know the selling price and you know the rate factor, calculating the lease payment is simply one very easy multiplication problem.  Leasing companies (lessors) offer dealers the lease rates for a given industry in a table format.   Knowing where to get the rate table that a given salesman has is a challenge.  However, you know someone that can get you the rates now.  That would be me, your advocate.   Another possibility is for you to call leasing companies and get rates.  Some leasing companies work with lessees directly.  If you have problems finding a rate for a given product, I am available to help for a reasonable rate.   I don’t have intentions of facilitating transactions directly, but I have many leasing companies in my database from which to obtain current rates for various industries.   You will save a substantial amount of money, if you have the rate information.  I will go over specific strategies for saving money in posts categorized under strategies.  I will offer specific ways for you to put together your own lease program.

An example of how a lease payment is calculated is the simplest way to illustrate

Let’s assume the following:

  •  The best price on the copier equipment of your choice is $10,000.
  •  You want a five year (60 month) lease.
  •  You want a fair market value (fmv) purchase option at lease end.
  •  The best rate factor I have for that is .0189.   For office equipment, that is a highly competitive, real rate.

Multiply 10,000 by the rate…. 10,000 x .0189 = $189.00.  Therefore, the lease payment is $189.00.  Add sales tax and you’ve got it.   Its a simple process if you know the rate and the best price of the equipment, right?    I bet Florida will have a deep freeze before a copier dealer gives you that rate on that price. Here’s why.   It is known in the equipment industry that customers don’t shop the rates and have only knowledge of prices and comparisons with other dealers.  You can outsmart the equipment rep by knowing the fair rates.  Watch him or her back peddle when you pull out your calculator and show your correct calculation.   That approach can save real money for you.

Why do equipment dealers not disclose the rate factor?

Equipment dealers are not required to disclose the rate factor or interest rates.  The Uniform Commercial Code, Article 2 does not require full disclosure of rates in commercial lease transactions.   Furthermore, the dealer can use his or her own rate or play with the purchase price, since the customer is left in the dark.    For example, lets suppose the payment you are quoted given the above scenario is $259.00.  You can figure out the invoice amount (purchase price) the dealer gets if you know the rate.  Divide the lease payment by the rate factor.  This simple algebra uses the same basic equation to solve for the unknown. In this case, the price.    So, $259 / .0189 = $13,703.00.   The dealer just netted  $3,703.00 more than they quoted for cash.  The additional cost to you (lessee) would be $70.00 more per month times  the number of months in the lease (60).   $70 x 60 = $4200.00.     Is this unrealistic?  Absolutely not.  Equipment dealers do it every chance they get.  The equipment dealers assume (usually correctly) the prospective lessee does not know how a lease payment is calculated.

Hopefully, this post has taken some of the mystery out of how a lease payment is calculated, how equipment dealers can play with the rates and values to profit more at your expense and how you can save money by calculating the payment.





About the author

Eric Klee

My name is Eric Klee. I've been in the equipment leasing and service business since my first professional job in 1984, in Saginaw Michigan. I've owned several small businesses, including two copier companies. I presently own Digicor, inc., an independent copier sales, service and leasing compay I began in 2000. I call Tampa Bay, Florida home, having moved here from Flushing Michigan in 1989.

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