How to Determine Lease Amounts on Equipment

Leasing equipment can be a wise business decision. Learning how to determine the monthly payment is important. Understanding the components of an equipment lease, the cost factors, and the benefits can help you make the decision between leasing and buying.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Equipment price or value
• Effective interest rate
• Residual value of equipment
• Length of lease

1. Find the manufacturer's suggested retail price (MSRP) of the equipment to be leased. Since the equipment is to be leased, it's not necessary to search retail outlets to find the lowest consumer price. Lease companies will use a more standard price to base their lease amount and monthly payment amounts.

2. Determine if any "advance payments" are required. Some equipment leases require one or two advance payments to complete the lease contract. One advance payment is equal to the normal monthly payment for the remainder of the lease contract.

3. Get a residual value for the leased equipment. The lease companies being considered will offer a residual value number. Residual value is the estimated value of the equipment at the end of the lease. The higher the residual value, the more reasonable the monthly payments during the lease term.

4. Learn the "imputed" interest rate or get the monthly "lease factor" from the leasing company. Since a lease is not a loan, there is no stated interest rate or annual percentage rate (APR) to be quoted. But, there is always a "cost of money" involved. Most lease companies will quote a lease factor, stated as a percentage that the company uses to calculate a monthly payment.

5. There are typically three lease type choices: a fair market value (FMV) option, which allows the lessor to purchase the equipment at the end of the lease term for the residual value or FMV; a 10 percent buyout lease, which permits the lessor to buy the equipment for 10 percent of the value of the equipment at the inception of the lease; and a $1 buyout lease, which allows the lessor to keep the equipment for payment of $1 at the lease's end.

6. Choose the lease type that works best for your company. The lease factor will differ with the type of lease. For example, a $1 buyout lease payment will usually be higher than an FMV buyout lease. All payments are fully tax deductible for a lease versus buying the equipment, which requires a depreciation calculation over the loan term.

Tips & Warnings

• Understand that lease payments will be different for FMV, 10 percent, and $1 buyout leases.
• Make a lease/buy decision based on cash flow and equipment needs before lease calculation.
• Don't compare purchase (loan) interest rates with lease imputed interest costs, as that analysis typically indicates the purchase option to be best. Leasing brings other benefits that must be factored, also.
• Keep lease calculations simple to minimize confusion when comparing lease payment offers.

References

• Lease Computation Formula
• Lease Amounts Differ with Lease Types

Resources

• To Lease or Not to Lease

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