“What Is A Lease Financing Rate?”
An equipment lease financing rate is the effective rate of interest or capital cost associated with a given leasing contract or agreement.
Because leasing is effectively a type of financing, the cost of financing or cost of capital is going to play into any leasing decision you might make.
From a financing cost perspective, there can be a number of different elements that go into accurate calculation of a leasing rate.
First of all, a lease payment is typically due at the beginning of the payment interval where a loan will usually have the debt servicing payment at the end of the payment interval.
So with a lease, the first payment is principal only as no time has gone by that would result in a cost of financing.
Second, leasing companies will typically want one or more payments in advance. If you are paying the last payment in advance for example, then there is a time value of money associated with that payment that ends up being a cost to you over time.
Third, if you are looking at a lease where there will be a significant residual value at the end of the lease term, the residual value will result in interest carrying costs during the lease term. This means that compared to a loan where the full value of the loan will be repaid during the term, the lease will have smaller principal amounts and higher interest amounts on each payment.
This does not necessarily mean that the cost of financing is higher with an operating lease as a percentage, but the total cost of financing will be higher.
Because of the different aspects of an equipment leasing payment calculation, it can be difficult at times to accurately determine the true cost of capital.
But without accurate numbers, it will make a comparison between lease and loan options difficult to make.
Just like standard amortization calculators, there are also lease calculators available on the internet for your use. The challenge with them, however, is that they do not tend to allow for all the different ways a lease can be structured.
In many cases, the only way to accurately calculate the leasing rate is with a financial calculator with proper inputting of the correct variables.
If you’d like to make sure you properly understand the leasing rate relative to any particular equipment leasing option, I suggest that you give us a call and we’ll go through the math and calculation together.