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Today we’re discussing what goes into determining the actual cost of leasing.
The actual cost of leasing can be incredibly deceiving. Unlike many consumer transactions which require disclose of Actual Percentage Rates (also known as APR), a lease, by its form and nature, does not have an official interest rate. But, by the substance its nature, most equipment leasing is actually a financing arrangement in disguise. And as such, all equipment leases have an implicit rate of interest that can be calculated and compared to other financing arrangements.
Many people who sell leases will often quote something called a “lease factor” percentage, and deceptively present this percentage as if it were the implicit rate of interest in the lease. Nothing could be further from the truth. The lease factor is simply the calculation of the lease payment as a percentage of the fair market value of the equipment at the inception of the lease. In other words, the lease factor might be 5%, but the implicit rate of interest, which is your real cost of money, may be three time that amount or more.
The true interest rate can be computed using a loan amortization program, and will consider the timing and amount of each payment. Sometimes the implicit rate of interest will be fair, but sometimes it will be astounding! Most are in the range of 12-20%, but I have actually seen them as high as 50%.
To learn how to calculate the implicit rate of interest on a lease, visit our video library at www.cfooutsource.com.