Lease Buyouts and Upgrades Cost You More Than You’re Aware
So, you’ve got an opportunity to get out of your lease early and upgrade to that new equipment you’ve been dreaming about. The dreams started about a year into the last lease and haven’t stopped. Finally, three years into a 48 month lease, you got the good news —- You’ve been approved to upgrade! Or maybe, you’ve had a great year and you are going to save some cash by paying of your debts. That includes that monthly Printer lease of $255.00 and some bank loans of $300.00 a month for another 6 years. Before you get too excited, lets talk about this. Getting new equipment is fun and paying off debts is just too cool for school. There’s some lease buyout upgrade facts you must know before jumping off the deep end.
Nice Vacation For Two in The Caribbean
The Bahamas are beautiful islands, surrounded by the most amazing beaches and ocean. It’s truly a paradise you should visit. If you upgrade your lease as in the paragraph above, you’re paying to be there with your honey for a nice 4 day getaway, including deluxe accommodations. No, you’re not winning the vacation, you just paying the leasing company owners way. Remember that leases are non-cancelable and you signed up for a (hypothetical) term of 48 months. Let’s say you made 36 payments, so you’ve got twelve remaining. The nice man offering you the opportunity of a lifetime, probably isn’t going to tell you what he’s going to do for you (to you). Well, he’s computed that 12 (remaing payments) x $255.00 (your monthly lease payment) = $3065.00. But Wait! There’s More…
Your Bonus for Upgrading Your Lease Early
The first of the lease buyout upgrade facts you need to know is that you, get to pay the $3065.00 shown in “red” (in the red) above. But here’s the beautiful thing; you get to pay that over the term of the next lease, and it is financed into the payment just like the value of the new equipment. I said there was more and I don’t break promises, so here you go. In addition to the entirety of the remaining payments, your upgrade buyout also has the “residual” value added in. But wait, you say, “I have a $1.00 buyout”. Well, if that’s the case you lucked out, because they will only add in some small fee that they will call whatever they want to. It may be $300.00 or more. Basically, it’s all profit that you pay because you are in a non-cancelable lease.
Something Extra Nice Because You’re Appreciated
If the leasing company was talking to you in full disclosure, this is what they would say: “Hi Mr. Jones, we are going to refinance your unpaid lease payments into the new lease with all of the interest already calculated in from the first go around. We think it only fair that you pay interest on interest. We are also going to charge you an additional fee. Oh yes, we can do that because we are essentially letting you out of your old lease early, which we don’t have to do. Remember, its non-cancelable for any reason! That fee, in this case is $300.00, thank you. And by the way, there’s $148.00 in property taxes due. Let’s see, that brings your total to ($3065.00 + $300.00 + $148.00) $3513.00. Yup, that’s it. Enjoy your new printer, sir! ”
Behind The Curtain is Where the Magic Happens
The above paragraph explains, hopefully in an entertaining fashion, what actually goes on behind the scenes. This is information that would be required by law to be disclosed under consumer law. However, commercial finance law is a different ball game. Non disclosure is the name of the game. In my 22 years as a copier dealer owner, active as a sales person and wearing many hats, I’ve never seen a competitors quote that disclosed buyout, upgrade or any other information that wasn’t required by law. Sure, you can demand to know the information, and sometimes, you may actually get an answer. The leasing company, not the equipment dealer, is more likely to let you know what’s going on. But that isn’t very likely either. “Here’s the payment. Here’s the term,. this is what we’re bringing you”.
So far in the upgrade example, I’ve laid out the additional $3513.00 you’re going to pay as a result of upgrading or “trading in” the old lease early. So, what does the new deal look like? Let’s assume the new “printer” in our example has a retail price of $12,000, for illustration purposes. Picture yourself now, talking to the sales rep. He’s so excited, he can hardly contain himself. “Mr. Jones, this is an amazing deal. This new model “UB81″ Printer never ever breaks, it hardly uses any toner, and its just remarkable. Best of all, I’m going to give you the UB81 for the same rate you are paying right now! We’ll haul the old one off, and that old lease, well that’s history”.
Anatomy of a Lease Upgrade – A Behind the Scenes Look
If you understand the dynamics of a deal from the equipment dealer’s perspective, you will have a better appreciation for how and why the lease buyout upgrade facts aren’t easy to figure out for yourself. So, I lay it all out here. Copiers and Printers usually have a dealer cost that is between 55% 70% off of the retail price. That means that the new “UB81” printer with a retail price of $12,000, has a likely dealer cost ranging from $3,600-$5,400. You can see that the profit potential is huge. Can you see how the buyout can be added in, undetected?
Your sales rep calculates the total yield at $255.00 per month for the same term of 48 months. Use the same formula used to calculate the lease payment, in reverse, using the rate table. We assumed a $1.00 lease buyout earlier in this article, for computing our upgrade buyout. So, lets also assume you are getting a $1.00 lease buyout option on the new lease too. If you look up the rate for 48 months, $1.00 buyout in the rate table, you can see .02679 is the applicable rate for the new lease. Now, solve for the unkown, using the formula; Lease payment = rate factor x total amount. So, we have $255 / .02679 = X, where X is the total cash yield of the deal. X= $9518.48. Now, subtract the buyout of $3513.00, the upgrade buyout computed earlier; $9518.48-$3513.00=$6305.48. Total payment to dealer is $6305.48.
You can see from the calculations how the dealer sales rep works his (or her) magic. Do you still feel this was a great deal? Perhaps you do. I’d like to get your comments and reaction to the information you just read. Is it complicated or clear as a bell? If we assume the dealer paid $4500.00 for the equipment, which is right in the middle of the range suggested two paragraphs up, the dealer profited $1805.48. Its not an excessive profit perhaps, but that’s not what really matters. Profit is a necessary part of being in business. My concern for you, is that given this situation, you have financed $3513.00 more that was necessary. It happens daily. Somewhere, a similar situation is happening right now. How can you apply the lease buyout and upgrade facts you must know by now, and save $3513.00 for your business? Read on –.
Take That Trip You Deserve – Avoid Early Lease Upgrade
If your bags are still packed for that trip to the Caribbean, get ready to go! I teased you earlier, but that’s when it looked like the printer dealer was taking his partner. Let’s see if you can still get to go. Suppose, you turn down the “amazing” upgrade offer. Instead, you keep the machine for the remaining twelve months left on the lease. Recall that you have a $1.00 buyout on the printer. That means you don’t have to worry about providing notice to the lessor of your intention to return or keep the equipment. You will own the printer at lease end, so you can sell it on Ebay, use it as a backup or perhaps keep it if its still functions suitably. Once the payment is done, you may decide to go for some time without one (a payment).
It’s your choice, now that you own the equipment. So, lets just leave that alone with the satisfaction of knowing you have no associated debt, just an asset with some minimal value, if any at all. Let’s revisit the new lease with the UB81 printer, assuming its still the latest and greatest thing. It’s been a year, so it may be discontinued in favor of a yet more fabulous printer. However, the rep says its still the greatest ever. So, you’re just going to go ahead and pay $255.00 per month right? Wrong. You are now $3513 healthier than you were a year ago. Now, not only do you want a better deal, the real deal, but you are now armed with knowledge and the Bahamas are nice this time of year.
Negotiate the New Deal without Upgrade Buyout
The sales rep will remember nothing about the lease upgrade buyout and what it was a year ago. You don’t actually know what the buyout was, even though I let you peek behind the curtain, for learning purposes. On the other hand, you remember the payment was $255 and you had 12 months remaining at the time of the “amazing upgrade offer”. Therefore, you know the rep added at least $3060.00 into that lease. Rest assured, there is always a fee to get out early, even when you are upgrading. As I said earlier, its usually $300-$500, so you should ask for that much or more to be taken off. In addition, you know that you pay property taxes on equipment you lease. You should get $3500.00 off the amount financed in the new lease, which happens to be pretty close to what the upgrade buyout was. That’s no coincidence.
If you know you should get $3,500 off, how do you calculate the payment. Recall four paragraphs above, we divided our payment of $255.00 by the rate factor of .02679, from the rate table for 48 month $1.00 buyout. The total cost is $9518.48. Subtract the $3500.00 and you get $6018.00. That’s your deal to take! Figure your new payment, using the lease payment formula; $6018.00 x .02679 = $161.22. That’s your new lease payment. So, what you’re actually saving is (255.00-161.22) x 48 = $4,261.44 over the next 48 months. I hope you remembered to pack your sunscreen!
Pay Down That Debt
I highly recommend you pay off your debts. You save interest and avoid the possibility of late fees. However, do you really save anything by paying off a lease early? Suppose you’ve got some cash, as mentioned in the first paragraph. You want to pay down your debt. You should know that when you pay of a lease early, it is called a buyout and its not the best way to apply your free funds.
There are 3 lease buyout upgrade facts you need to know before paying ahead on a lease.
- Equipment leases (capital leases) do not have early pay off provisions. – You will not save finance charges by paying it off early. It’s not a simple interest loan.
- There is usually additional charges when you pay off the lease early – Remarketing fees, buyout admin fees, early release fees. They are referred to under a variety of names.
- If you have an FMV (fair market value) lease purchase option, the buyout will usually have the purchase option added into it.
Most leasing companies give preference to lease upgrades over buyouts and payoffs. The leasing company keeps your money coming in, when an upgrade takes place. In the case of early payoff, the lessor loses the ongoing cash flow. Consequently, if you’re the upgrade customer you are penalized less than is the payoff customer. Its counterintuitive that the lessor would rather receive your money later than immediately, however, that’s how they roll. Perhaps the opportunity for late fees, lease upgrade or failure by you to make the required termination notification, are all income possibilities that offset the benefit of accepting your money early. Unfortunately, It just doesn’t pay for you to end a lease early.
Summary of Critical Lease Buyout Upgrade Facts For your Review
- There are two methods for you to end a lease early – buyout and Upgrade
- The buyout requires you pay the remaining lease payments, plus additional fees and purchase option
- The upgrade is similar to the buyout, except that you finance the buyout into a new lease. You will almost always pay more than just the remaining payments.
- If you keep your lease term to the minimum affordable period in months, you will lessen the likelihood that an early upgrade or buyout becomes necessary.
- Commercial equipment lease finance law requires limited disclosure, therefore upgrades may not be transparent
- When you upgrade a lease, you are financing your previously financed lease debt, yet not receiving the full benefit of the equipment.
- Financially speaking, its always best practice for you to go to term on your lease.
About the Author
My name is Eric Klee and I’ve been an owner of two copier companies over the past 22 years and currently am owner of Digicor, Inc. I hope that you enjoy and benefit from reading all of my writing and The Lessee’s Advocate at Http://lesseesadvocate.com. I consider myself an expert in the field of equipment leasing and have been engaged in thousands of lease situations, starting in 1984 with my first sales job at a 3M dealership in Saginaw Michigan. I enjoy sharing my knowledge and writing about lease buyout upgrade facts and other aspects of small business, particularly with interest and expertise in the copier printer industry and lease finance.
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