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Today’s topic is the difficulty in getting out of the lease. One of the biggest drawbacks with equipment leases is that that they are not only very difficult to get out of, most are extremely expensive to get out of as well. The reason is that most leases involve a very simple, yet ironclad agreement. It says you will be provided the equipment for a stated period of time, and in return, you will pay X dollars per month for X number of months. It doesn’t get any simpler than that. You have agreed to make all of the payments over the life of the lease no matter what.
But what if you want to get out of it? If you had purchased the asset instead of leasing it, you could sell it, pay off the loan, and then settle up with the lender on the difference. But with a lease, in order to get out, you have to make all the payments that are remaining on the lease.
To put this in perspective, think about what would happen if you sold your house. You would call the bank, get the loan balance, sell your house, and pay off the loan. But what if, in order to sell you’re your house, you had to make all of the remaining scheduled house payments? This would make your loan payoff 2-3 times as much, or more. This is exactly how it is with a lease. Now granted, the term of the average lease is not 30 years as it is with a house. But even a 5-year term can have a substantial impact
As an example, let’s say that you had the choice of either buying a $50,000 car and financing with a 60- month loan at 10% interest or leasing it for 60 months under a lease with an implicit rate of 10%. And let’s say that after two years you want to get out of it. If you had used a conventional loan, you’re remaining loan balance after two years would be $32,924. But if you had leased, your remaining lease obligation would be $38,245. It would therefore cost you $5,321 more to get out of the lease than it would under a standard loan.
To learn strategies of how to get out of a lease contract, visit our video library at www.CFOoutsource.com.