MCPc Blog

Focus on Leasing: Understanding Your Lease Payment

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If you are a numbers geek like me, the process by which you calculate a monthly lease payment is fascinating. If you aren't, however, then this can be quite a tedious process.

To simplify the task, I'd like to share with you a table that I find helpful in calculating monthly lease payments to determine their overall cost. When looking into several lease options, filling out a table like this can help sift through the details and determine which package offers the best deal, and how each would compare to financing costs for purchasing.

Example:

Let's say your business needs a $38,000 multifunction plotter. You can finance the plotter for $1,250 per month for 36 months, or you can lease it for $790 per month for 36 months. In this example, the lease price appears to be significantly less expensive per month.

Below is a pre-calculated lease for your new multifunction plotter. This example represents the major inputs and outputs that a leasing company or bank will use when calculating your lease payment. The goal is to understand the definitions of the various components that make up a lease payment. 

The yellow highlighted cells are your inputs. All other cells are calculated for you. Please keep in mind that the example below is for example purposes only and does not reflect a live transaction. 

Simple "Large Ticket" Lease Pre-calculated Example:

Before signing any lease agreement, there are likely a few basic questions that you'll want to be able to answer. Using the example and table above, let's go through a few of the major ones:

How do I know if $790 per month for 36 months is the correct monthly payment? 

As you just learned in the above example, the $790 per month payment is calculated based on a number of factors. The factors that play into your monthly payment are the Total Finance Amount, Soft Costs, Term, Credit Worthiness, and Lessor Total Equity. So the payment is always correct. There is no grey area in the calculation. 

How does the leasing company make its money?

The leasing company makes a small amount of money based on the debt rate spread. The lessor also has a cost of funds. If the lessor's cost of fund is 6% and passed along a debt rating of 6.25% the leasing company only makes 0.25%. Leasing is a competitive business so the spreads are typically very low.

The leasing company makes most of its money by reselling the plotter at the end of the term. It is in the leasing company's best interest to keep their Lessor Total Equity as low as possible while keeping the Lessor FV Equity as high as possible. Keep in mind that the leasing company cannot artificially set these amounts because the market for used plotters is based on industry established residual values. 

How much interest am I paying?

In the above example your organization is paying 6.25% interest.  Keep in mind that many leasing companies do not discuss interest rates, only money factors.  There is no harm in asking about the interest rate being used to calculate your lease payment. 

Am I getting a good deal? 

In this example you got a good deal. The lessor is taking a very high position in the deal and is rating your organization's credit as investment grade. Your ability to get a "good deal" depends on two things.

• Your organization's credit — something that you, as the IT decision maker, cannot directly affect.
• The lessor's familiarity with the types of products that you are considering leasing — a leasing company that specializes in plotter leases will take a more aggressive position in your plotter lease than a leasing company that specializes in other products. Like your organization specializes in its core competencies, so do leasing companies.

So, as you can see, by taking a careful look at all the values that affect your total lease cost, you can determine the overall quality of the lease agreement and easily compare it with others.   

Please feel free to download the Leasing Calculator Excel sheet and use it to evaluate your next leasing option.

Focus on Leasing Topics:

1. Leasing Vocabulary
2. Financing Decisions
3. Advantages of Leasing
4. Capital vs. Operating Leases
5. Understanding My Payment
6. Picking a Lease Partner
7. The OEM Lease
8. Interest-Free Leasing
9. Managing Lease Schedules
10. Managing the End of Lease Process

Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group.  Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University.  Connect with Jeff on LinkedIn.