“What’s the rate?” This is a question we’re constantly asked but always hesitant to answer. Not because we think other leasing companies will have better rates, in fact, as a bank-owned direct lender, our rates are one of the most competitive in the industry. The fear stems from the rate game, a game where arbitrary rates under the guise of an “A.P.R.” are thrown at a customer and the lowest quoted percentage takes the cake. This snap judgment is something we’ve all been conditioned to do but in the equipment leasing world, rates rarely reveal the whole story.
For example, Company A quotes a rate of 7.5% while Company B quotes a rate of 7.75%. For many novice business owners, Company A would be the obvious winner and that would be the end of it. However, when comparing all the parameters of each proposal, one soon realizes that the 7.5% rate is not the better program. Unfortunately, leasing companies represent rates using a variety of “creative” calculations. If one only listens to rate and does not compare payments, terms, options, etc., they will probably end up paying more on their lease.
If we investigate further, we will see that Company A’s rate did not take into account what advance payments were required upfront. The 7.5% rate is not an “Annual Percentage Rate” but simply a stream rate based on the monthly payment. In reality, Company A’s APR is much closer to 8.5%. If the customer compared the two programs, they could easily see that although they were quoted a lower interest rate of 7.5%, their payment is in fact higher than Company B’s quote which represented an actual APR of 7.75%.
Rather than comparing rates, it is important to understand total payback in a lease. In the example above, if one simply multiplied out all the payments and compared how much they were actually paying out of pocket, Company B would have been the clear winner.
If we look at the comparison below, at first glance, Company A’s total payback (36 months x $3,065 = $110,340) appears lower than Company B’s payback (36 months x $3,092 = $111,312). However, when comparing the Purchase Options, in order for the lessee to own the equipment under Company A’s proposal, the lessee would need to pay an additional 10% or $10,000, bringing the total cost of Company A’s lease to $120,340 ($9,028 higher than Company B’s lease).
Again, Company A’s quote reflects a simple stream rate based only on the monthly payment; it doesn’t account for the advance rental due or the final purchase option. If those 2 factors were taken into account, the APR would be closer to 12%. When looking at different proposals, it is always important to make an “apples-to-apples” comparison.
Advance rentals are one or more lease payments that are required to be paid to the lessor at the beginning of the lease term. A leasing company will usually require the first month up front or the first & last month upfront or none at all. If you are asked to pay the “last only” in advance but the first payment is due upon delivery & acceptance, this is the same as a “first & last” since 2 payments are being requested prior to the lease start date. The number of advance payments has an effect on the interest rate.
True advance payments are applied to a first and/or last month’s payment however, with some leasing companies, the payment instead is held as a “security deposit” to be returned at the end of the lease term upon request. If this is the case, you must remember to request this “deposit” at the end of the term and then follow up for receipt.
This is essentially an additional payment where the leasing company charges you for each day you possess the equipment prior to your first scheduled bill date. If for example, your equipment is delivered and accepted on the 2nd of the month and your first bill date is the 15th of the month, they will charge you for an additional 13 days. That’s almost an additional half payment which would dramatically increase your interest rate.
It is important to know exactly what your monthly payments will be when your lease starts. Unfortunately, some leasing companies claim to base their payments on fluctuating rate indexes and “adjust” your payment right before they start your lease. With these quotes, it’s important to understand exactly how they are calculating your payment and how much your monthly payment can potentially increase with every incremental rise in the rate index. This information can help protect you against a “bait and switch.”
It’s important to make sure your lease documents include the purchase option you have been quoted. For example, if you were told you would own the equipment at the end of the lease for One Dollar then there must be a document stating this option. If no option is included, the leasing company is able to charge what they want at the end of the term. If you do not execute the option, you will be responsible for returning the equipment to a location chosen by the Lessor. It is very important that you get everything in writing and not rely on what was verbally told to you or what was presented in a lease quote.
With some leasing companies, you are required to notify them well in advance of your intention to either pay off the purchase option or return the equipment at the end of the lease term. If you miss their deadline, they can automatically renew your lease for an additional year. An additional year’s worth of payments on top of a purchase option is an extraordinarily expensive lease! This provision is called an Evergreen Clause and has been stricken from a number of leasing company’s contracts but many others continue to include it. If you come across this clause in your lease, request that it be removed immediately before executing any documents.
Remember to get everything in writing. Although many leasing companies are honest and reputable, there are also many that aren’t. Examples of issues some business owners have experienced can be found in the link below.